Hedge funds and private investors are increasing their presence in the reinsurance market, raising concerns among established players about the stability of catastrophe coverage.
Stefan Golling, a board member at Munich Re, the world’s largest reinsurer, said the influx of alternative capital could introduce new risks and volatility to the sector.
The reinsurance market, which has traditionally been dominated by companies such as Berkshire Hathaway, Munich Re, and Swiss Re, is seeing more competition from hedge funds and family offices.
These private investors have entered the space through vehicles like catastrophe bonds and sidecars, which allow them to assume risk in exchange for premiums from insurers.
Reinsurance pricing at the midyear 2025 renewals shifted in favor of cedents, reflecting increased competition among capacity providers and a surge in catastrophe bond issuance. According to AM Best, the growth in 144A property catastrophe bond issuance has broadened investor participation and contributed to greater capacity in the market.
As a result, small- and mid-sized insurers have increasingly accessed capital markets to sponsor catastrophe bonds, gaining more flexibility in managing risk.
Meanwhile, Aon also reported that alternative capital in reinsurance reached approximately US$115 billion at the end of 2024, up from US$93 billion in 2022. This growth has changed the dynamics of the market, as private capital now plays a larger role in providing coverage for natural disasters.
Global reinsurer capital reached US$715 billion as of September 2024, an increase of US$45 billion since the end of 2023. This expansion was driven primarily by retained earnings and record catastrophe bond issuance.
In an interview with the Financial Times, Golling said that while private capital helps meet the rising demand for insurance – driven by inflation, population growth, and climate change – there are questions about whether these investors fully understand the risks involved.
“In the traditional market, a big hurricane will not be a surprise,” he said. He noted that some of the new capital “is not informed in the same way as an underwriting company.”
The sector has not yet experienced a 50-year or 100-year event that would test the resilience of the catastrophe bond market, Golling said. He suggested that after such an event, investors might reconsider their participation.
“It has to be seen whether the capital that backs up those cat bonds will reconsider their strategy after such an event,” he said.
A recent example occurred after Hurricane Ian struck Florida in September 2022. Golling said uncertainty among private investors about their losses led some to withdraw from the market, which put pressure on the availability of certain layers of reinsurance and contributed to higher prices for both traditional and alternative capital providers.
Golling also pointed out that private capital often focuses on covering rare, high-severity events, such as megastorms, rather than more frequent risks like hail. He acknowledged that critics have made similar observations about traditional reinsurers, who are sometimes accused of raising prices or avoiding frequent perils after large losses.
However, analysts suggest that M&A activity could resume as organic growth opportunities diminish and the market eventually softens.
Golling explained that when traditional reinsurers increase prices, it is often to maintain strict underwriting standards for primary insurers, aiming to protect the long-term profitability of the sector.
“You have to feel the pain yourself,” Golling said, referring to the rationale behind increasing the retention, or deductible, for primary insurance companies.
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