April 2, 2013 12:01 am

Investors pour $35bn into reinsurance

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A $35bn influx of funding from capital markets investors has prevented traditional reinsurers from raising prices during the latest round of negotiations.

Facing low yields from other prospective asset classes, investors, including pension funds, have ploughed an estimated 30 per cent more capital into the esoteric area of catastrophe reinsurance than a year ago.

A closely tracked study published on Tuesday by the broker Willis shows that the phenomenon helped primary insurers avoid overall rises in premiums as they concluded fresh deals with reinsurers over the weekend.

More than $2.5bn of reinsurance premiums have just been renegotiated in the spring renewal season, which is dominated by Asian markets including Japan, Korea and India.

The outcome of the price talks for “insurance for insurers”, one of three that take place each year, is important in determining future premium levels for consumers and businesses.

James Vickers, chairman of Willis Re International, said ­traditionally-conservative investors such as pension funds and life insurers were increasingly becoming an alternative to reinsurance providers such as Munich Re, Swiss Re, and Lloyd’s of London. Such investors, combined with others including hedge funds, have committed $35bn in funding to the global catastrophe reinsurance market for 2013, up from an estimated $27bn a year ago.

“Investors are desperately looking for non-correlated yield [returns with no connection to financial markets],” he said. “The longer the low interest rate environment stays, the more they’re looking for something a little bit different.”

“They only need to put [in] half a per cent of their funds and it’s an absolute wall of money,” he said. “Capital markets are coming in and taking traditional business away.”

The inability of reinsurers to increase prices also reflects the absence of natural catastrophes in Asia since a series of disasters in 2011. Prices for some types of reinsurance, such as Japanese wind, flood and earthquake property protection, have this year ticked down about 2.5 per cent, according to the Willis report. This is in stark contrast to a year ago, when rates for some Japan-based insurers more than doubled after catastrophes including the earthquake and tsunami in 2011.

Only those underwriters that have endured losses high enough to trigger reinsurance payouts are facing rate increases. Even those, however, are experiencing only modest rises of about 10 to 15 per cent.

The increased interest of capital markets investors is changing business models in the sector, the Willis report said. Historically, after big losses investors have set up new reinsurance companies.

Now, however, they are investing through less permanent capital structures as reinsurers, such as London-listed Lancashire, set up vehicles to manage the third-party sources of funding.

Some insurers have expressed concern that the new sources will flee when returns from other asset classes strengthen.

“What happens if [an area such as] banana futures suddenly looks more attractive, or yields [from bond investments] improve?” Mr Vickers said.

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