Yesterday in Monte Carlo, Munich Re board member Stefan Golling told a media briefing that alternative reinsurance capital and the catastrophe bond market in particular, are not helping to narrow the insurance protection gap, while highlighting the reinsurers’ independence from third-party capital.Given where we are in the market cycle and the fact competition is rising, it’s not that surprising to hear comments such as this emerge and where better that at the Rendez-vous where the industry sets out its stall for the coming weeks.Stefan Golling, a member of Munich Re’s Board of Management, said, “Traditional reinsurance capital remains the backbone for the transfer of all kinds of risks.Munich Re has the best geographical diversification in the industry.

Our capital strength allows us to retain all risks on our balance sheet and thus remain independent of retrocession markets and third-party capital.We support clients in all regions, for all risks and all return periods.Our clients can rely on long-term capacities: Even after a mega event, such as an extremely powerful hurricane with an unprecedented market loss of well over US$ 100bn, our solvency ratio would still be well above the upper end of our target corridor of 220%.” During a media briefing held in Monaco today, Golling went into more detail, “I think, especially ahead of Monte Carlo, you can see almost on a daily basis a new report about record levels in cat bond issuance or limits in the market.

But I think it needs to be noted, that it’s not so much an increase in the overall capacity, but rather a shift in the alternative market, from collateralized re instruments to cat bond instruments.“You cannot really directly compare the capital shown here as the dedicated reinsurance capital with the capital of the alternative market.The dedicated reinsurance capital is basically rated equity, and the alternative capital is mainly collateral.

“So by benefiting from the diversification, the traditional reinsurance capital, the rated equity, can be used by reinsurers a number of times to protect our insurance clients.“The $100 billion of collateral can basically only be used once, or in most cases, only be used once, especially when you think about products like cat bonds.” He pointed to the period since 2017, saying that traditional reinsurance capital has grown at twice the rate of alternative.That’s perhaps no surprise when you know the history of this period and the challenging losses passed to insurance-linked securities (ILS) markets through the very loose terms the reinsurance market were underwriting on in the run up to 2017 and then the major catastrophe loss events that occurred.

In fact, if you look at the data from the providers that Golling’s data set was based on, over a shorter period since 2022 (a time around when the reinsurance market capital base was shrunken by some losses and other macro issues), traditional capital has grown 23% since that year, while alternative capital has grown by 30%.Growth of different capital bases aside, as this should not be considered a race, more interesting perhaps are Golling’s comments on the protection gap.On the cat bond market, referring to the California wildfires and US severe storms this year, where he said cat bonds didn’t really contribute to paying losses (although they did to a degree, as readers will know), Golling said, “It is, unfortunately also no solution for closing the protection gap in the more developing and emerging markets, simply by the focus on the peak perils in the US market.” He called out the focus of the cat bond market on peak perils and the US as evidence that it is not helping on the global insurance protection gap.

Of course he also suggested that Munich Re does assist.He added, “The protection gap is much bigger in emerging, developing insurance markets, and there we simply have not seen in the past that the cat bond market had an appetite for, or had maybe the appropriate tools available to develop an appetite for.Very often, the cat bond market uses the vendor models available and of course, these models have been more tested and more improved over the years on peak peril exposure, where you have the huge accumulation potential and not in the same extent on smaller scenarios.

And affordability is, of course, another driver of that as well.” But it does deserve some additional comment around this subject, as we feel it over-simplifies the different roles traditional and alternative capital increasingly play in the global insurance and reinsurance market.It’s worth noting that natural catastrophe insurance protection gaps globally have been widening and it remains above 50% in some years in the United States, perhaps higher still depending on the peril mix seen, and as high as 90% or more in countries such as India.The catastrophe bond was developed for a very specific purpose, to absorb some of the peak risks large global reinsurance and insurance companies did not want to support on their balance-sheets and those peak, higher layers can at times be less capital efficient for equity balance-sheets anyway (there are more productive ways to use your reusable capital stack).

Munich Re was an early proponent of the cat bond and in recent years has called for the capital markets to support narrowing protection gaps in perils like cyber.When it comes to the United States, where the cat bond is most prevalent (for good reason, given the perils and exposures there), the protection gap between economic and insured losses remains very wide and there is no sign currently of the traditional insurance and reinsurance industry narrowing this on their own.In fact, the protection gap has widened when you look over the last few decades.

Of course, economic development, value-at-risk increases and inflation have been rapid, while catastrophe and climate related losses also high.But, just consider how wide the protection gap might be without the supporting reinsurance risk capital the catastrophe bond market has been providing? Would many smaller, or even larger US insurers, be as effective as they are today without cat bond risk capital filling out upper-layers of their reinsurance towers? Would traditional players like Munich Re be able to take the rest of the risk? Perhaps they would, we can’t know the extent of their appetites.But would equity investors support that and would that make the reinsurers need more retrocession, some of which would naturally come from capital markets sources? Also, what if severe events occurred in aggregation? How would the traditional industry respond and recapitalise at the pace required? All questions worth asking.

It’s worth also considering some additional comments from Golling at the RVS, where he said Munich Re has confidence in its underwriting and that “combined with our independence from the retrocession markets, third-party capital, we can keep our promise to our clients that we are the most predictable provider of that capacity in the market.” Munich Re is far from reliant on third-party capital, in fact it is one of the major reinsurance cohort that is far less reliant in the top-tier.But, the reinsurer has a capital markets arm and has made money structuring and placing catastrophe bonds or other ILS arrangements, while it has also sponsored cat bonds for its own retrocessional protection, .Munich Re also has collateralized reinsurance sidecar arrangements.

One that is more syndicated to capital market investors and also private sidecar arrangements with major ILS investors, such as with PGGM.So, the company, while not at all reliant on, does benefit from capital markets interest in reinsurance and ILS partnerships.The big question is, were the cat bond never to have existed, would the traditional reinsurance market have made greater inroads into narrowing protection gaps? Looking over the track-record of the progress made in narrowing protection gaps over the last few decades, not just in nat cat, but in life, health and other lines of business.

While the traditional market has grown, covered a lot more risk, kept pace with developments and economic expansion, the gap between economic and insured losses has in many cases still risen.Of course, it is the RVS time of year.So as we said, positioning and rhetoric is no surprise and .

But, it does feel like this volatile and sometimes catastrophic world requires the full breadth of capital solutions and perhaps reinsurers would benefit from embracing this, to lever up their own balance-sheets and do more with less.Thereby enabling more risk capital to go to where it is needed the most..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.

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