Capital markets to move into non-peak zone cat

Having already become a big player in the peak zone catastrophe business, pension funds, endowments and hedge funds are now trying to move into non-peak zone catastrophe business as they look to diversify their investments in reinsurance sector business.

That is the view of Stefan Holzberger, managing director, analytics, AM Best. “We’re seeing the non-peak zone – whether it be in Eastern Europe, floods in Western Europe and Asia Pacific risks that are not considered peak zone – being sought after by the investment community to round out and diversify their book of catastrophe business,” he said.

He added that the reinsurance market is attractive to investors at present because despite softening rates it presents business that is priced well enough that in a normal catastrophe year the reinsurance market should be able to generate high single digit to low double digit returns.

“Part of that is going to be driven by reserve releases on old accident years, so if you look at current accident year performance largely due to the soft market conditions, the technical performance and the returns aren’t all that strong. But if you add to those returns the benefit of releasing reserves on older accident years, you take that 7 and 8 percent return and you increase it to 13 or 14 percent; that’s a pretty strong return in comparison to what you’re getting from other asset classes,” he said.

He said there are now two main challenges facing European reinsurers: the first is that the competition from the capital markets for high margin peak zone cat business will pressure the profits of European reinsurers, as well as their top line.

The second challenge for many European insurers is related to their primary life businesses, particularly those businesses involved in with-profits savings or annuity products.

“Low interest rates and market volatility has put strain on life products with high guarantees and generous policyholder options,” he said. “Most carriers’ investment yields remain above guaranteed rates, but barely – profit margins are squeezed and capital could take a hit if these low rates persist.”