Excess capital will protect ratings
Mike Van Slooten, head of market analysis–international at Aon Benfield, discusses key industry trends in the wake of recent major catastrophe losses with Baden-Baden Today.
How is the reinsurance sector likely to be affected by the recent hurricanes?
We should start by acknowledging the terrible impact these storms have had on the lives of thousands of people.
Unfortunately these events have highlighted once again the low levels of insurance coverage for natural disasters in even the most advanced economies.
It has been a long time since events of this magnitude have been seen in the US market. Reinsurers are coming off the back of a very profitable period that has allowed them to strengthen their balance sheets and this has been recognised by the rating agencies. They are also set up specifically to deal with events of this nature. We therefore believe traditional reinsurers are well-positioned to cope with this level of loss.
What is particularly interesting about these events is that they represent the first real test of the alternative capital sector, which has shown significant growth over the past decade. We believe a significant amount of alternative capital has been either lost or ‘trapped’ in these events and we wait to see how investors will respond. It seems likely that material new capital will enter the industry, given the lack of decent investment opportunities elsewhere.
All this suggests that there will again be very substantial levels of capital in-play at the January renewals and that the marketplace will remain competitive.
Aon’s recent Reinsurance Market Outlook report mentioned regulatory pressures. What are your key concerns in this area?
When we look at regulation globally, we see some jurisdictions showing protectionist trends. This raises a certain amount of concern, as in many ways reinsurance has been the poster child of globalisation—a proven risk transfer mechanism that thrives on the free movement of capital and risk.
Some of the regulatory changes that are happening have the potential to hinder that, and I feel that would be a backward step for the industry.
Why is this important for reinsurers?
Three key factors affect pricing in reinsurance: losses, interest rates and market structure. When external forces affect the way the market works then that has an impact on pricing, as anything that restrains the free movement of capital and risk adds cost to the business.
There are a few examples of this trend emerging in Asia, partly spurred by regulatory changes. We generally see risk-based capital regimes as positive frameworks, as they ensure that companies understand risk and hold sufficient capital against that risk. But the downside is that they tend to be introduced in a way that can make it more difficult for external capital to enter the market.
Mike Van Slooten is head of market analysis–international at Aon Benfield. He can be contacted at: mike.vanslooten@aonbenfield.com
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