New capacity threatens smaller players

Favourable returns on US peak catastrophe risks combined with poor investment returns elsewhere has caused a growing number of mutual funds, hedge funds and other capital sources to try to capture a portion of US peak catastrophe business. But there are inhibitors to these investors diversifying into a wider range of risks.

That is the view of Edouard Schmid, head of property and specialty underwriting for Swiss Re, who says that the commoditised nature of US cat risks make it the perfect product for this type of investor.

“This money cannot be easily transferred to other lines of business besides US peak catastrophe because the barriers of entry are higher in other areas and also US peak catastrophe is quite a commoditised product. That means it is easier if you’re not a long standing player in the industry to take away some of this business from reinsurance,” he said.

He added that the influx of alternative capital has dented general reinsurance rate improvements in the US but that this capacity poses the greatest threat to the smaller, more opportunistic reinsurers. For this reason he is confident about Swiss Re’s sticking power.

“We not only provide peak capacity to our clients, but we also tailor solutions to fit their needs and provide a lot of services and expertise alongside the capacity,” he said.

“We pick up business from cedants that are tempted to get some of this alternative capital, giving them a price benefit, but are still very interested to have key resources that come with a more long term promise, because this alternative capacity has not been tested yet.”

He said the big question is how the new players will react when interest rates move up significantly or they experience their first big losses. Either scenario could see them move away from the market and seek more attractive areas for investment.

“The staying power of this capacity is not proven and reinsurance is pretty much a long term promise. You’ve got to have certain reliability and capacity, and also to be there when a big loss happens,” he said.

“All these elements are really what Swiss Re can bring to the table, so we are confident we can keep our business but for the smaller reinsurers that don’t have much of a different proposition than these alternative providers, I think there will be some angst.”