It’s always refreshing to hear that the original premise for the capital markets entry into reinsurance holds true, even for the very largest reinsurers in the world.
Speaking this morning, Swiss Re CEO Christian Mumenthaler acknowledged that the insurance-linked securities (ILS) market is a necessary force within insurance and reinsurance, as the depth or the global capital markets are required to support the underwriting of insurance in the peak catastrophe zones.
Asked about the influence and competition from insurance-linked securities (ILS) markets, the Swiss Re CEO said that he distinguishes between the fully securitised ILS product (so the catastrophe bond) and what he terms alternative capacity.
Alternative capacity, to Mumenthaler, is the capital markets backing reinsurance structures such as sidecars, quota shares and other collateralised forms of reinsurance or retrocession it seems.
Commenting on this difference and how he views competition from alternative reinsurance capital right now, Mumenthaler explained, “ILS is not that big, the biggest competition comes from people who put the capital behind other reinsurers, so unrated if you want through sidecars and the like.
“We saw after 2017 that this was the expected event, so a lot of people came back and refilled. After 2018 the appetite has waned a little bit.”
Mumenthaler clarified that where he has seen the appetite wane a little is in the alternative capacity space, not the ILS market (so cat bonds), as “only very big nat cats touch it.”
As a result he explained, “We have seen less inflows of alternative capacity, but competition is still high.”
But while some might suggest that Swiss Re is not a fan of insurance-linked securities (ILS) or alternative capital, given it has itself pulled back from issuing cat bonds in recent years and its Sector Re sidecar has not grown substantially for many years.
Of course, Swiss Re is still very active in helping clients to access the capital markets through catastrophe bond issues and other transactions where the firm acts as a structurer or bookrunner, putting its investment banking unit Swiss Re Capital Markets to good use.
But, as well as being a source of income for Swiss Re and an added value service it offers to clients looking to tap into the appetites of major institutions to access reinsurance linked returns, Mumenthaler himself still recognises the need for capital markets backed capacity in reinsurance.
When I first began tracking the catastrophe bond market, around 23 years ago with the very first transaction in our Deal Directory, there was a widely held belief in re/insurance that the capital markets, being the deepest and most liquid source of capital available, should be tapped to help insurers and reinsurers manage their peak catastrophe exposures.
The idea was that the re/insurance market alone could not absorb the potentially enormous losses that could occur, the 1-in-100 or 1-in-200 year earthquake events, the record-breaking hurricanes, and other potentially devastating (for the market) catastrophe loss events.
So the cat bond provided a tool through which the capital markets could be tapped for additional reinsurance capacity to absorb these risks, leading to the development of ILS as an asset class.
Of course things have moved on somewhat, with ILS strategies now playing along the risk-return spectrum of insurance and reinsurance, covering losses for a much wider set of scenarios than just the extreme tail events.
We’d say that’s progress and was an inevitable occurrence, as the investor base got its taste for insurance-linked returns.
But the original premise still persists, that when the really major catastrophes hit the re/insurance market, it is hard to imagine all companies surviving without the support provided by the capital markets.
Mumenthaler still buys into this, saying this morning, “We’re not negative to ILS. You will need the capital markets to cover the really big catastrophes in this world.”
He highlighted major perils such as California earthquake risk, saying that here ILS is clearly required.
“If more people were to insure, which I hope they will, then the reinsurance space is too small. So you will need this access to the capital markets,” Mumenthaler said.
It’s also worth suggesting that re/insurers will need direct access to the capital markets to support their underwriting of a much wider range of risks and scenarios as well, as the efficiencies of insurance-linked markets continue to give their traditional business models a run for their money.