LONDON (Reuters) – Munich Re said it was considering launching afund to allow investors to buy catastrophe bonds and otherinsurance linked securities (ILS) to build on the growing demandfor the instruments that are linked to natural disasters.

Insurers and reinsurers have used the instruments since the1990s to manage their exposure to hurricanes, earthquakes and othercalamities, by transferring potential losses to investmentfunds.

Investors receive a high rate of interest but risk losing all orpart of their principal if a catastrophe occurs.

ILS sales have risen sharply this year thanks to a growingperception they are insulated from shocks in more mainstream partsof the market.

“ILS have proved their worth as a risk-relief tool,” Dr. AndreasMüller, head of ILS Investments Department in Munich Re'sRisk Trading Unit, said in an internal magazine.

The world's biggest reinsurer itself invests in catastrophebonds and is a regular sponsor for its own securitizations – themost recent being Queen Street V Re Limited, a special purposeinsurer which covers Munich Re from claims for U.S. hurricane andEuropean windstorm risk.

ILS investors say the 'cat bond' sector was likely to grow by 25percent in 2012, reaching $6-7 billion in issuance by the end ofthe year – matching a previous record set in 2007 .

Muller added that ILS should account for “around 4 percent ofpremium volume in non-life reinsurance” in the medium term.

Munich Re's rivals including SCOR and hedge fund managers DanLeob have already launched ILS funds.