Alternative capital shows signs of perminancy and cat bonds ‘complement’ reinsurance pricing by ‘stepping in to provide more cover for frequency risk as reinsurers have retrenched from that’, according to Moody’s
Alternative forms of reinsurance capital, such as catastrophe bonds and sidecars, are “increasingly embedded in the insurance and reinsurance ecosystem as a permanent form of capacity”, with the value of outstanding insurance-linked securities (ILS) reaching “a new high” of $144.5bn at 2026’s half-year.
This is according to Brandan Holmes, senior vice-president at credit agency Moody’s Ratings, who addressed trade press during a London event on 1 September 2026, following the publication of the ratings firm’s ‘Sector In-Depth’ bulletin entitled ILS resilient as softer reinsurance market shifts mix of transferred risk.
Holmes explained the interplay between the ILS market and traditional reinsurance, with alternative capital input growing by more than $50bn in around five years.
For him, a key driver of this growth has been a “strong shift” in the risk appetite of alternative capital investors – these backers have increasingly moved away from a “heavy focus on very remote, peak tail risk” to instead look “down the attachment layers into more frequency risk in the catastrophe bond market”.
Holmes attributed this pivot and “broadening of perils” covered by the ILS market to improved risk understanding.
“Investors [are] getting more comfortable with the modelling of those risks,” he said.
“The models improving for some of those risks [mean they are] better understood and that ties into secondary perils having become such a big topic over the last five to seven years.
“ILS investors find the returns on the higher frequency risk increasingly attractive and that’s why you see growth in catastrophe bond issuances.
“It’s interesting to see the mirroring of the pricing dynamics between the two sectors and how they complement each other, with catastrophe bonds stepping in to provide more cover for frequency risk as reinsurers have retrenched from that.”
Moody’s Ratings’ bulletin confirmed: “As ILS pricing moderates, investors are committing more capital to instruments with higher underlying risk of loss – aggregate covers, frequency protections and secondary perils such as wildfire, flood and severe convective storm – in search of stronger returns.”
Structural shift
Holmes additionally pointed to the current soft (re)insurance cycle as a further driver of alternative capital demand.
“Catastrophe bonds tend to be multiyear, so three to four to five years,” he noted. “You can lock in the price now and hedge against reinsurance prices going up, so there’s a bit of tactical overweight allocation to catastrophe bonds in some portfolios.”
Other factors influencing ILS popularity include greater alternative capital awareness contributing to “more sponsors” and “larger deals” being confirmed, as well as “a broadening of geographies” getting involved. For example, Holmes observed a “few European issuances this year”.
A unique example here, according to Holmes, is Moody’s Ratings’ producing a rating score in H1 this year of Baa2 for “one of the first catastrophe bonds to be rated for many years”. Issued by German insurance group Gothae, the Yardstick Re catastrophe bond solely covers “very remote” German flood risk.
Holmes described Yardstick Re as being “very comparable with reinsurance pricing”.
He continued: “Because of the price point, the remoteness of the risk and the investors it accessed, [Yardstick Re is] an example where the catastrophe bond was actually competitive with reinsurance for [a] very remote risk.”
Summing up these trends, Moody’s Ratings’ bulletin stated: “Taken together, these trends amount to a structural shift. Insurers and reinsurers are making greater use of ILS, including collateralised reinsurance, sidecars and catastrophe bonds, selecting the most appropriate and cost effective source of capacity for each risk.
A growing share of risk is now also originated and distributed by entities other than traditional carriers, MGAs in particular, then ceded to collateralised vehicles such as sidecars.
Managing exposures across a broader range of risk transfer options allows capital to be deployed more efficiently and helps reduce the earnings volatility that has long characterised the reinsurance cycle.”
ILS ‘equilibrium’ within reach
Laurent Rousseau, global capital and advisory chief executive at newly rebranded reinsurance broker Marsh Re, previously Guy Carpenter, agreed with Moody’s Ratings’ stance.
He commented that fast growing alternative capital in the secondary market is “not a blip in a cycle”, but the new “shape of our market”.
However, he warned that ILS investors – such as pension funds, sovereign wealth funds and endowments – still have plenty to learn about re/insurance risk if alternative capital models are to be sustainable, rather than focused on short-term returns.
Rousseau explained in an online press briefing held on 1 September 2026: “Reinsurance capital continues to increase – it is rising on both sides of the ledger.
“Traditional reinsurers are building capital through strong retail earnings, [but] alternative capital is growing faster still and continues to take a larger share of total reinsurance capital. Let me be clear – this is not a blip in a cycle. It is the shape of our market and has been so for several years now.
“Investors continue to allocate more capital to our industry and they are right to. This alternative capital makes the reinsurance industry more efficient. It matches capital to a market that has delivered an extremely profitable position to investors. But we should be honest about the conditions for that to endure.
“Capital markets are not without volatility. Many investors are still on a journey to understand insurance-linked securities in all their forms. For this market to be sustainable, investors must understand the true nature of insurance and reinsurance risk. They need to understand the very nature of claims development and adjustment.
“Investors so far have bought into the returns. They now need to buy into the risk and understand [that] operating in the reinsurance industry commands responsibility. Financial markets are volatile by nature and it will be years that test conviction.
“But let us make no mistake about the direction of travel. This has been a long-term trend and [it has] not yet found its equilibrium point. The capital markets are no longer a visitor to our industry. They are now a resident.
“Reinsurers [that] know how to partner with the capital markets and [that] make that partnership part of their value proposition, rather than a hedge on the side, will [have] the durable competitive advantage,” Rousseau said.
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