One only had to gaze through tinted Ray-Bans at the Monte Carlo marina during the Rendez-Vous de Septembre to see how much the industry has changed in just a year. Absent was the much-loved GE Insurance Solutions yacht with its flurry of blue and white flags. In its place, ABN Amro's mammoth racing yacht that made all the other boats look like toys. Never before have so many powerful capital market investors converged on a reinsurance gathering.

The rumour mill swung firmly back into action at this year's gathering. The absence of a dramatic hurricane season (so far) fuelled whisperings about a new set of start-ups in the pipeline for an already saturated Bermuda. With Hiscox and Omega jumping ship from London to Bermuda (and two further syndicates rumoured to be following suit) Hamilton is likely to sink under the sheer weight of reinsurers and sidecars piling on top of it. Whether Ironshore, a $1bn capitalised reinsurer, is sufficient to give credence to a “Class of 2006”, it is worth remembering that this time last year many were disputing the idea of a Class of 2005.

With much of the industry talk continuing to centre on dwindling capacity for peak exposures, many agree there is still opportunity in this arena. New rating agency capital requirements and recalibrated cat models prompted many reinsurers to reduce their US wind exposures in the months following Katrina and her sisters. Those with available capacity are choosing to hold back, in the expectation that premium rates will soar still further.

Helping to plug the catastrophe capacity gap is a boom in non-traditional reinsurance products such as sidecars, cat bonds, swaps and industry loss warranties (ILWs). “What they're doing is providing capacity and capital that traditional reinsurers aren't willing to commit at this point in time,” explains Mark Rouck, senior director at Fitch. “It's a convergence between traditional reinsurance and the capital markets.”

Sidecars, dubbed the “disposable reinsurer” by virtue of their limited lifespan (“Talking 'bout a revolution” on page 12), have become the popular solution for those reinsurers unable to get their hands on retrocession. In just one year it is estimated that over $4bn has gone into 18 post-Katrina sidecars, according to Benfield. Cat bonds have also come of age (page 16). Benfield expects US cat bond placements to double from approximately $2bn in 2005 to $4bn in 2006. And hedge fund favourite, ILWs, are expected to take more than $4bn of limit this year.

It's official. Hedge funds have fallen in love with reinsurance, a fact only too evident by their impressive turnout at the Rendez-Vous. Described as “opportunistic and short term” by Fitch Ratings, these highly liquid, somewhat secretive and unashamedly exclusive asset class are all over insurance-related risk. That they see value in investments uncorrelated to the performance of their other investments is clear, but they also aim to exploit pricing inefficiencies.

“Hedge funds tend to view themselves as experts in analysing and pricing risk,” explains Richard Major, director of insurance investment strategy at Deutsche Asset Management. “And they look to find pricing anomalies in reinsurance risk – that's what they do with most financial markets.” He added that hedge fund investors see reinsurance as being less efficiently priced than other kinds of risk.

Hedge funds' penchant for a quick exit strategy has led some to question these investors' long-term commitment. But Major sees the industry's growing involvement with the capital markets as an opportunity. “To the extent that the capital markets and the reinsurance markets converge you might improve the pricing efficiency of risk,” he explains.
As another Rendez-Vous comes and goes – with balance sheets, relationships and livers still remarkably intact – so we get set for the start of another Baden-Baden gathering. Which is where the real work begins… in Germany's favourite spa town where the sunglasses are firmly off.