Munich Re, the world’s biggest reinsurance firm, sees an opportunity to leverage alternative reinsurance and ILS capital, from institutional investors such as pension funds, to help it grow and address high severity risks which require significant capacity.
The reinsurer sees alternative capital as an opportunity more than a threat and expects to use more of it in the future. Munich Re recently hinted at opportunities it saw to leverage the capital markets and alternative capital within its business and it appears that the reinsurer is pursuing this.
In fact the firm is already exploring its options and actively discussing its use internally and possibly also with some investors as well.
CFO Jörg Schneider said; “We are in talks to use more alternative capital. It is a challenge to the industry, but in the mid-term it is a very important element for our future growth, for very high capacity, very high risks.”
Schneider, speaking during the reinsurers analysts call minutes ago, said that alternative capital is an interesting option for Munich Re. He explained that the reinsurer would not seek to take advantage of cheaper retrocessional capacity in order to arbitrage the market, however, warning that this has in the past resulted in reinsurers getting stuck with exposure on their books when market conditions shift.
Schneider said that Munich Re would like to use alternative capital as a contributing source of capacity in large and complex risks. He gave the example of an oil spill re/insurance facility, with a capacity of $10 billion, that Munich Re established with a number of capital providers in the past.
Establishing large reinsurance facilities and programmes such as Munich Re has done takes more capital than reinsurers can provide on their own. The need for large pools of capacity is set to increase as the world’s emerging economies develop and as climate change impacts weather and catastrophe loss patterns.
Schneider said that these arrangements will benefit from the addition of capital from more and diversified sources.
Munich Re has clearly decided to target growth using alternative capital to help it. This is, in our opinion, a smart move at a time when some of its competitors have taken an opposite tack of continuously questioning the permanence of insurance-linked investor capital and saying that their balance-sheet is best.
“To us it seems more and more that the alternative capital provides more chances than burden,” said Schneider.
This is good news for investors in insurance-linked securities (ILS) and reinsurance-linked investments. If Munich Re really decided to become expansive, in terms of growth ambitions, it could bring a significant amount of alternative capital into the market to support it.
The firm has such depth of expertise and underwriting talent that institutional investors and even ILS fund managers would no doubt be keen to support such efforts and to access the risks Munich Re might develop and share with the capital markets. It will be fascinating to see just how far the reinsurer takes this initiative and what risks it targets.
In the past, chairman Nikolaus von Bomhard suggested that leveraging capacity supplied by the capital markets could help to increase insurance penetration, in regions where risks are often inadequately covered.
“Increased mobilisation of the capital markets offers interesting opportunities for the insurance industry at the interface between risk assessment and risk diversification,” von Bomhard said back in August.
Schneider said during the analysts call this afternoon that this is one area that Munich Re sees significant opportunities, to target increasing the penetration of property, catastrophe and casualty insurance and reinsurance coverage into emerging markets.
Perhaps the reinsurer could pursue this goal with the use of alternative capital and its Eden Re sidecar, turning that vehicle into a truly globally diversified property catastrophe ILS play. That would be a fascinating prospect, both for us as observers and for investors looking to tap reinsurance-linked returns and to access a diverse portfolio of risks.