Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Munich Re sees opportunities to scale-up relationship with ILS


The world’s largest reinsurance firm Munich Re sees opportunities to scale-up its relationship with ILS and the capital markets as a way to secure efficient retrocession for its own book, to help its clients access investor-backed capacity and to earn fees by providing services to the ILS sector.

Munich Re already access the capital markets through its own collateralized sidecar arrangements, the now $300 million Eden Re II vehicle which sees the firm sharing a portion of certain risks with institutional investors and also the $400 million private sidecar arrangement with ILS investor Dutch pension fund manager PGGM using its Leo Re vehicle.

The reinsurer also used to sponsor catastrophe bonds as part of its retrocession program, but in recent years this has slowed somewhat and right now, despite being the largest of its kind, the reinsurance firm has less than $400 million of cat bond protection outstanding, according to Artemis’ data.

Munich Re calls its sidecars and retrocession program the “channels” through which it can access alternative sources of reinsurance capacity, providing it with access to a broad and global investor base, particularly useful for managing and hedging its peak natural peril exposures.

But sharing its own risk portfolio with institutional investors is only one aspect of Munich Re’s use of the capital markets, the reinsurer also offers a range of alternative capital and ILS related services to its clients.

That means the capital markets and the related ILS investor relations has a twin focus for the reinsurer, helping it to enhance its own management of risks and also and also enhancing its offerings to clients by facilitating access to the capital markets through the channels Munich Re has established.

The majority of reinsurers now have this dual pronged strategy for engagement with ILS, with some making it a larger piece of their business than others.

At Munich Re this is dwarfed by its own underwriting book, of course, but the relationships and channels to capital that the reinsurer has set up will be primed and ready to help it maintain its presence in core property catastrophe markets, should their rates decline below its own cost-of-capital targets.

Munich Re sees its activities in ILS and with alternative capital as part of a “unique value proposition in managing peak risk with client access to institutional investor capacity,” helping the firm to leverage the capital markets for its clients and its own book.

The firm’s ILS services for clients can be provided to its clients as customised and stand-alone services, where the reinsurer acts as facilitator for a clients access to the capital markets, or as an integrated offering alongside its own traditional reinsurance solutions.

In this way the reinsurer can earn fees for business it may not have seen otherwise, become a better partner for its clients through a more full-service offering and also leverage the efficiencies of lower-cost capital from institutional investors alongside its own, to optimise coverage options for its clients.

Munich Re sees opportunities for this business to grow as well, citing the broad distribution channels to alternative capital that it has established and calling its relationship-based approach to ILS a strategy that will allow for scaling-up.

In embracing ILS and the capital markets Munich Re faces the same issue as all other reinsurers with ILS activities, how to ensure that these efforts are additive to the bottom-line and not just shifting some of the profits to third-parties, while reducing the return for its shareholders.

If the right balance can be found then scaling up activities in the ILS market could provide valuable fee income, help Munich Re to better manage its portfolio of risks and create additional third-party backed underwriting capacity with which the reinsurer can look to expand its own footprint in the global marketplace.

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