Every few years it feels like groundhog day again, as we begin to see a rise in negative sentiment towards the insurance-linked securities (ILS) market and its investors from major traditional reinsurance companies, typically at a time of rising competitive dynamics in the marketplace.With the Monte Carlo Rendezvous event around the corner, what better time to talk your own book? It wouldn’t be the RVS time of year without a story or two that pitches the traditional against the alternative sides of reinsurance.Munich Re may have unintentionally set the tone for the 2025 event, as in , Stefan Golling, a member of Munich Re’s board with responsibility for Global Clients, North America and also its Capital Partners unit, cautions that private capital may prove less sophisticated and more flighty after major catastrophe events.Which is a message we’ve heard before from major reinsurers at different points in the market cycle.

But most typically this happens when competition is rising, as we see today.It’s important to add, that comments can often be portrayed in such a way as they can seem out of context with the interviewees original intention.The FT says that Golling’s comments imply that Munich Re sees “private capital’s push into tools such as cat bonds” as increasing volatility for the reinsurance sector.

Hedge funds and private investors “muscling” in on reinsurance threaten to destabilise the sector, Golling of Munich Re is said to have warned the FT.This has introduced new risks and greater volatility into reinsurance, the FT says Golling explained. He told the FT that private investors could “lose their nerve” after a big payout.“In the traditional market, a big hurricane will not be a surprise,” Golling told the FT, but added that “capital is getting involved that is not informed in the same way as an underwriting company.” It’s worth pointing out here that the majority of capital backing catastrophe bonds and many other private ILS arrangements is being deployed by specialist managers of ILS, which are effectively fully skilled-up reinsurance teams that operate with a more asset management, or hedge fund like approach.

That involves risk analysis, modelling and selection.Where as, for comparison, a large reinsurer backed sidecar may simply offer investors a vertical slice of their catastrophe book, with risks not being actively selected on behalf of the investor, rather being selected for the reinsurer and then shared through quota share cessions after the initial picks have been made.Golling did say to the FT that new entrants are positive, to help the industry meet the world’s need for disaster insurance.

But, the FT says he questioned whether newcomers have understood the risks they are taking on.Bear in mind again, that most ILS investors come into the sector through strategies where there is an independent manager assessing risk on their behalf.“We haven’t seen a 50-year or 100-year event that has exhausted the cat bond market,” Golling made the valid point, adding “It has to be seen whether the capital that backs up those cat bonds will reconsider their strategy after such an event.” This is true, although for every test thrown at it so far, the cat bond and ILS market has tended to respond with discipline and stability, recapitalising and enabling counterparties to trade forward with certainty.

There is also no guarantee of how easy reinsurers, like Munich Re, would find their own recapitalisation after a truly historic loss event.Here, the FT goes on to state that Golling said (we reproduce in full from the FT’s article): He added that the market had already glimpsed the destabilising effects of a retreat by private reinsurance capital after Hurricane Ian hit Florida in September 2022 — just as insurers kicked off renewal negotiations.Private investors’ uncertainty about the losses they faced threw the availability of some top layers of reinsurance into doubt, prompting some to withdraw and “stressing” the market, Golling said.

The FT explains that the post-Ian market environment saw reinsurance prices charged by both capital markets and traditional reinsurers jumping higher.While there may have been some doubt about the availability of ILS capital for a number of weeks after hurricane Ian, this was incredibly early in the end of year reinsurance renewal negotiation process.As 2022 unfolded, the cat bond market swung back to life as more clarity over the potential losses from hurricane Ian emerged and it quickly became clear that the traditional reinsurance market, including Munich Re, was raising its prices during a time where ILS had been quoting less, also due to the uncertainty and losses left behind by Ian.

Interestingly, Golling is also said by the FT to have “criticised private capital for only signing up to cover the most statistically improbable risks.” Which is a little rich in a market environment where the largest traditional reinsurers have also shied away from frequency losses in recent years.In addition, it’s worth remembering what ILS was invented for, covering the peak catastrophe loss events that occur less frequency but that could deplete the balance-sheets of even the largest reinsurance companies.The world’s largest reinsurers recognised a need for access to a deep and liquid pool of capital to help them cover such eventualities.

It’s an interesting piece in the FT today and one that raises memories of periods such as the mid 2010’s, when we regularly saw heightened competition in the market result in negative sentiment pushed towards ILS from the large reinsurers.At the same time, those large reinsurers were also filling their portfolios when pricing was on the way down.It’s undeniable how much some major reinsurers grew in US nat cat risk underwriting between 2012 and 2017, while at the same time terms were in some cases dramatically loosened.

It’s worth thinking about what that period of time showed us on discipline in the market and considering what the industry has learned from it this time around.On the topic of volatility and the fear capital could be slower to rebuild, more nervous, or exit entirely after a truly major catastrophe loss event, it’s worth asking how such an event would also impact equity-backed reinsurance companies, listed and private.Whether they would be able to replenish their capital as quickly as the cat bond and ILS market? It’s untested, but there is a lot to suggest that the capital markets may actually turn out to be an even larger provider of global risk capital to the insurance and reinsurance market, after the event Golling is cautious of does eventually occur.

Finally, when that major catastrophe event does happen, it’s worth also considering just how much capital may be recovered by re/insurers through their catastrophe bonds, private ILS and collateralized retrocession, reinsurance sidecars and other instruments backed by the capital market and its investors.Which would be a significant benefit to companies like Munich Re and others after a severe stress event, providing capital that would be welcome to help them trade through a difficult time..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.

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