Munich Re says ILS investor “flight to quality” benefits its retro program

The much-discussed “flight to quality” of insurance-linked securities (ILS) investors is benefiting Munich Re through the support shown to its retrocession program, the company said today.

In a media presentation given today as a virtual replacement for its annual event at the cancelled for 2020 Monte Carlo Rendez-Vous, the global reinsurance company explained how market dynamics are providing opportunities and benefits to its business.

With reinsurance rates now hardening, Munich Re’s CEO of Reinsurance Torsten Jeworrek acknowledged this trend and explained that it is expected to persist.

Hardening rates are one driver for investor appetite for reinsurance-linked returns, but after the impacts of recent years there has been a well-discussed flight to quality among ILS investors, as they move allegiances towards managers of their capital that can provide the access to business they want, as well as towards more liquid investment opportunities.

Munich Re is benefiting as investors look to back its underwriting, through its retrocession program and structures such as its quota share sidecar program, under the Eden Re Ltd. vehicle.

This “flight to quality” of ILS capacity is supporting our retrocession program, the company explained.

Jeworrek noted that ILS capacity is not expected to grow significantly and that a reasonable percentage remains trapped, or locked in after loss events as claims develop.

Some ILS investors are turning their attention to more liquid products, Jeworrek said.

Here, the catastrophe bond market is expected to be a beneficiary, as investors look to access returns from the reinsurance market through investment funds that can offer them more simple and frequent liquidity options.

On reinsurance rates and the expected continuation of rate hardening, Munich Re predicts “more hardening in reinsurance than in primary lines,” Jeworrek said.

Driving rates are factors including the continued increase in losses from so-called secondary perils, as well as the influence of climate change.

But the retro market and how it has contracted, in terms of capacity, on the back of trapping of ILS collateral, is also seen as one of the key drivers for reinsurance market hardening that is expected to persist into 2021.

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