11 September 2013 Alternative Risk Transfer

US appetite for alternative capital essentially a gamble

The influx of alternative capital into the North American market is leading to “the dawn of a new age” in reinsurance, but not one that should be viewed positively by reinsurers. That is the view of Dr Arno Junke, CEO of Deutsche Rück, who said that the relative conservatism of the European market has saved it from what he described as “gambling in disguise”.

He said that investors in US alternative capacity were in the “middle of the learning curve without knowing it”; with institutional investors dabbling in a high-stakes enterprise they don’t fully understand.

He said that the industry is waiting for its first reality check following a big event, but questioned why reinsurers in the US had opened the doors to alternative capital. He said that catastrophe models in the US market had led to a level of transparency that has encouraged confidence among investors, but questioned why traditional players had allowed themselves to be marginalised.

He said that investors were pursuing such business in good faith, but that they could yet face a nasty shock. Junke said that such business was in many instances not being priced in a risk adequate way, with potentially severe implications for those involved in the space.

Junke said that Europe was less enamoured with alternative capital due to the more conservative nature of the market. He said that in Deutsche Rück’s case the reinsurer had looked at alternative capital transactions as a means of acquiring retro capacity, but as yet had not gone further with its interest.

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