Investors are pouring more money into insurance-linked investments, putting some $2 billion into the little-known sector since the beginning of the year, a managing director of Goldman Sachs & Co. said last week.

At the same time, a continued convergence between the insurance industry and capital markets is driving the creation of new products, developed as new risks emerge.

"Cat bonds and capital market instruments are growing rapidly," said Mike Millette, in Bermuda for an industry conference. Mr. Millette's next engagement was an investor road-show for an "extreme mortality bond" being issued to protect a life insurer from losses in the event death rates rise because of a terrorist event or a flu pandemic.

Also on the rise are catastrophe bonds for natural catastrophes, he said.

"This is the new world since Katrina, there is growth in these instruments and convergence," Mr. Millette said, adding that demand for the bonds, which can give investors returns as high as 20 percent, are being driven by hedge fund investments.

Mr. Millette, active in the sector since 1988, said insurance-linked instruments totalled $7 billion last year. And the surge in investments so far this year is more than double what it was through the first two months of 2005.

Catastrophe bonds, a popular way for the capital markets to invest in the sector without making a direct investment in a company, allow insurance risk, in various forms, to be sold to institutional investors. In industry parlance, bonds linked to catastrophic risks are called 'cat' bonds.

Investors have been lining up to buy catastrophe bonds because they aren't correlated to more traditional risks: The insurance-linked bonds are only vulnerable to the cost of a catastrophe, not economic weakness, as is the case with corporate bonds. However, investors of catastrophe bonds stand to lose some or all of their investment if certain conditions under the bond are triggered by a catastrophe.

Besides rising interest in extreme mortality bonds, spurred by concerns an avian flu could reach pandemic proportions, similar instruments are sold to protect farmers in a bad-crop year, or to help the insurance industry continue to be able to sell policies in earthquake and hurricane-prone areas.

After Hurricane Katrina, several reinsurers boosted capital through catastrophe bond issues. Montpelier Reinsurance Holdings Ltd. was one of them: its bond issue gives the Bermuda reinsurer catastrophe protection up to $90 million ? $75 million for certain losses arising from earthquakes in the US or Japan. And up to $15 million if losses from multiple hurricanes or earthquakes are incurred in the US.

As with other catastrophe bonds, Montpelier's issue spreads the risk through the capital markets rather than through traditional reinsurance coverage. Insurers and reinsurers buy reinsurance to offset the risks in policies sold to corporations and individuals.

Rating firm Standard & Poor's in a January 6 report said "future structures may involve ever increasing complexity" and predicted that European life reinsurers could be most active in the arena.

Swiss Re, the world's second largest reinsurer last year sold its second tranche of an extreme mortality bond. Life reinsurance accounts for about one-third of Swiss Re's business.

"Key drivers of the market are regulatory changes, the availability and price of reinsurance, and the state of profitability in the sector as a whole," S&P said.

Capital requirements for insurance companies have grown since Katrina. This is largely because the ratings firms that track insurance companies ability to pay claims are demanding more capital be held by insurers after some were badly hit by claims from the 2005 hurricane season.

Catastrophe bonds can help insurers jump the larger capital hurdle. At the same time, a cat bond can also be a cheaper way to buy protection than the higher rates now being charged for traditional reinsurance in the current market.