Investors should not view cat bonds and private reinsurance as competing asset classes: Bruns, LGT

As both catastrophe bonds and private reinsurance continue to gain momentum, institutional investors should not be viewing the two as competing asset classes, as their respective strengths are complementary to each other, which ultimately allows investors to build more diversified catastrophe risk portfolios, LGT ILS Partners’ Christian Bruns told Artemis in an interview.

Speaking to Artemis around the 2026 Monte Carlo Rendez-Vous de Septembre (RVS) reinsurance industry event, Bruns, who serves as Partner/Portfolio Manager at LGT ILS Partners, outlined how investors can combine both catastrophe bonds and private reinsurance in order to achieve the most efficient risk-return profile.

Catastrophe bonds have heavily dominated recent ILS inflows, which has come as investors have adopted a view that cat bonds are a safer and more transparent alternative to private reinsurance.

Given this, we asked Bruns whether he believes this perception has been a crucial driver of recent capital flows.

“The dominant narrative is indeed that catastrophe bonds are less risky and more transparent than private reinsurance transactions. They are publicly marketed, benefit from more standardised documentation and provide regular price discovery through secondary market quotations. Those characteristics make the asset class easier to analyse, track and present to investment committees,” Bruns told Artemis.

“However, transparency should not be confused with lower risk. In fact, the average risk level of newly issued catastrophe bonds and the concentration risk in the market have increased over recent years, as structuring teams have pushed attachment points lower. At the same time, the market has benefited from a period with limited loss activity in its core exposure, namely US hurricane. This absence of recent large losses should not be interpreted as evidence of lower risk,” he continued.

Moreover, Bruns emphasised that concentration risk remains one of the most overlooked characteristics of today’s market, noting that despite recent growth, the catastrophe bond space remains heavily focused on peak US hurricane and earthquake exposures.

“Diversification across issuers and structures does not change the fact that a large share of the market ultimately depends on the same two perils. This is where private reinsurance allocations add significant value. Private deals provide access to a broader range of insurers, geographies and structures, enabling the construction of more diversified portfolios,” Bruns explained.

He continued: “Rated paper to access and structure such opportunities is of course key, such as LGT Capital Partners’ reinsurer Lumen Re. US hurricane remains a dominant risk driver in any catastrophe risk allocation, but portfolio efficiency can be improved meaningfully through the more granular diversification provided by a private reinsurance allocation.”

While catastrophe bonds offer clear secondary market pricing, Bruns challenged the notion that this equals greater overall transparency.

“Catastrophe bonds undoubtedly offer greater pricing visibility via the secondary market. However, price transparency should not be confused with depth of information. Private reinsurance transactions are typically conducted under strict confidentiality agreements. While less visible from the outside, this enables a much deeper underwriting dialogue including more detailed data exchange and, in our view, ultimately higher transparency,” he explained.

Bruns continued: “Investors can access granular portfolio information, actuarial analyses and management discussions that are rarely available in a broadly marketed catastrophe bond transaction. There is also another side to the transparency argument. Many insurers remain reluctant to access the catastrophe bond market because submission materials are distributed widely across market participants, including competitors. For some cedents, confidentiality remains a decisive consideration.”

Moving on to secondary market trading, which has traditionally been presented as a primary advantage for cat bond investors seeking liquidity and flexibility, Bruns observed that the market has increasingly shifted toward a buy-and-hold dynamic, with pure cat bond fund managers holding little incentive to sell attractive positions if the alternative is holding undeployed cash

“The more important distinction today may actually be flexibility. The catastrophe bond market has seen a notable shift towards longer-duration transactions, with four-year bonds increasingly becoming the norm. Sponsors are effectively trying to lock in what they view to be a cyclical low in pricing. Private reinsurance operates differently with most contracts renegotiated annually, allowing managers to re-price portfolios much faster when market conditions change. And market shifts are not necessarily driven by insurance events,” the Portfolio Manager explained.

“The asset repricing in 2022 showed how broader financial market stresses can reduce reinsurance capacity and drive significant rate increases. In such a scenario, investors holding long-dated catastrophe bonds are locked into lower spreads, whereas private reinsurance portfolios can benefit from improved market conditions almost immediately. In our view, this ability to re-underwrite and re-price risk annually is one of the most valuable, yet often overlooked, advantages of private reinsurance.”

While cat bonds continue to attract large influxes of capital, Bruns believes that a combination of complexity, execution risk and confidentiality are what’s keeping more insurers from moving their reinsurance programmes into the capital markets.

“Historically, catastrophe bonds carried a novelty premium compared to traditional reinsurance. That premium has largely disappeared as competition for risk has intensified and spreads have compressed. But cost remains a factor, although now mainly in terms of structuring and execution expenses rather than risk pricing. Today, the more important considerations are complexity, execution risk and confidentiality,” Bruns said.

“Many cedents continue to value the flexibility, speed of execution and the private nature of traditional reinsurance placements. Also the fact that traditional reinsurance is typically founded on a long-term relationship whereas cat bonds are of a highly transactional, almost anonymous nature plays an important role for many cedents.”

To conclude, Bruns stresses that the strategy isn’t choosing one over the other, it’s blending both to build a resilient, efficient catastrophe risk profile

“Ultimately, investors should not view catastrophe bonds and private reinsurance as competing asset classes. Their respective strengths are highly complementary, and combining both allows investors to build more diversified and resilient catastrophe risk portfolios.

“The key question is not whether catastrophe bonds or private reinsurance are better. It is how investors can combine both to achieve the most efficient risk-return profile,” Bruns concludes.

Read all of our interviews with ILS market and reinsurance sector professionals here.