Peak peril pricing "golden days” are gone
Third party capital investors have entered the reinsurance sector for the long haul and, what is more, the investment opportunity will simply look even more enticing should a big loss occur.
That is the view of John Seo, managing principal of Fermat Capital Management, one of the largest investors in catastrophe bonds in the world with more than $4 billion in cat bond investments under management.
“For every investor that leaves, three will enter. Most investors will likely inject more capital,” he said, when asked what a bad hurricane season could mean for the sector.
He also believes that the most critical factor in determining the attraction of this market going forward will be less about pricing and more about the diversity it offers investors. He said that this means investors will not necessarily seek higher yields should prices on peak cat risks continue to tighten.
“It is unclear what would happen because past experience indicates that overall yield levels on peak cat risks do not drive investors into or out of diversifiers,” Seo said.
Instead, he maintains that other lines and other cat risks will likely remain a core competence for traditional reinsurers. But it remains to be seen the extent to which other business can replace business on peak cat risks.
“Eventually, traditional reinsurers must re-evaluate how much marginal diversifier business they can subsidise as the golden days of peak peril pricing are likely behind them,” Seo said.
