Though this has been going on for years the offloading of risk is starting to draw some serious attention. And with the simultaneous specter of lower and lower premiums caused by the flood of capacity the bag-holders will be, if not retail, then unsophisticated players.
This is the point in the cycle where Warren Buffett and Ajit Jain would decline to cover perils they can't get paid for.
As noted exiting January 12, 2026's ""How GE Vernova’s ‘Good Times’ Could Mean Bad Times for Its Stock" (GEV)":
Warren Buffett ran into similar situations in Berkshire's reinsurance business. When re profits were good, everyone and his brother would flood into the market, writing policies at prices that Warren didn't think covered the risk. Rather than withdrawing completely he continued to offer policies at prices he thought were fair while telling the insurance companies that needed reinsurance cover that Berkshire would be there when the others had skedaddled.
The same is true for GE Vernova. They've been manufacturing and maintaining generators/turbines since Thomas Edison and J.P. Morgan formed the General Electric Company in 1889.
They'll be around to come make a service call when you think your turbine is making a funny sound....
From Bloomberg April 12:
Alternative investment managers are pouring unprecedented sums of money into the market for property cover, and reshaping a 180-year-old reinsurance model in the process.
Allocations to catastrophe bonds and other insurance-linked securities popular among hedge funds and institutional investors rose 18% to reach a record $136 billion last year, according to data provided by broker Aon Plc. That rise in alternative capital and “its influence in the broader reinsurance market is growing because of the record growth in catastrophe bonds,” Aon told Bloomberg.
The shift promises to alter the face of a market whose basic role is to provide stable property cover during periods of sustained losses. It also raises questions as to whether reinsurers will gradually play a smaller role as the ultimate backstop for covering catastrophe risk.
Reinsurers may end up becoming more like risk managers, “shifting the risk to the capital markets which have trillions of dollars to invest,” Brian Schneider, senior director of insurance at Fitch Ratings, said in an interview. And if “more and more of this business gets shifted to the capital markets, then maybe the traditional companies become less and less relevant.”
Reinsurers covered just over 10% of total insured catastrophe losses in 2024, well below the historical average of 20%, according to S&P Global Ratings. The industry’s biggest firms have more than halved their exposure to insured disaster losses in recent years, S&P also said.
Reinsurers are themselves the driving force behind the shift. That’s as urbanization, higher inflation and climate change combine in ways that mean natural catastrophes are both more frequent and more devastating when they hit. The industry’s response has been to look for ways to offload risk to capital markets.
They mainly do this by issuing cat bonds, an asset class that saw “breathtaking” growth in issuance last year, according to John Seo, managing director and co-founder of Fermat Capital Management, the biggest hedge fund investor specialized in such securities. Speaking in a February interview, Seo said he thinks “the issuance surge we’re seeing is far from over.”
Reinsurers are also attracting record levels of private capital into so-called sidecars. Such vehicles give third-party investors access to premiums, in exchange for which they must accept a slice of the risk associated with natural disasters. It’s a market that’s nearly tripled in size since 2023, reaching as much as $18 billion today, with much of the growth coming from property catastrophe coverage, according to AM Best, a rating agency that tracks the insurance industry.
Germany’s Hannover Re recently set up a Bermuda-based insurance agent to create bespoke catastrophe-related portfolios for hedge funds, pensions and other professional money managers.
“As part of the overall ILS activities that we have, we felt this was the missing piece,” said Michael Eberhardt, chief executive of the new venture, Hannover Re Capital Partners. “It allows us to leverage our own underwriting expertise and partner with third-party capital investors.”
Fitch notes that investors in sidecars can face potentially bigger losses than holders of cat bonds, should a natural disaster result in a trigger event. That’s because sidecars tend to be exposed to losses from more common secondary perils such as hailstorms, wildfires and floods.
“There’s concern that maybe some naive capital is coming in,” and that “investors don’t really think they’re going to get hit by a lot of these secondary perils,” Schneider said....
....MUCH MORE
I may end up purloining "naive capital" rather than having to explain who the "dentist from Peoria" is.:
October 2023
"Weather derivative market activity soars on belief extremes to increase: Report"
Action, baby, action!
