03 December 2013

CRE: Capital influx opportunity to service uninsurable risks, says broker

A leading broker has heralded the influx of alternative capital flowing into the risk transfer market as a 'wonderful opportunity' for corporate buyers and risk advisers to find solutions to emerging and previously uninsurable risks. In the short term, it will keep the cost of insurance competitive.

A panel of experts from the world of risk transfer noted that harnessing the new capital to ensure it stays in the insurance market will not be easy, adding that top management is likely to be wary of transferring risks via a potentially transient form of capital.

But speakers at the event jointly held by the Risk Management Institution of Australasia (RMIA) and the GRC Institute were generally optimistic about the opportunity afforded by the new capital and its potential to boost transfer options.

Jason Disborough, Managing Director - Global at Aon Risk Solutions Australia, said alternative capital supplied by the likes of pension funds, life insurers, hedge funds and private equity firms searching for better returns on investment is driving fundamental change in the risk transfer industry.

These sources of capital are attracted to the insurance market because traditional fixed term interest products and investments are only generating returns of around 1% to 2% at best, he noted during the Insurance and Risk Financing workshop.

Whereas traditional insurers and reinsurers have been prepared to underwrite risks to generate a return on capital from anywhere between 10% and 16%, the alternative capital providers are prepared to enter the risk transfer market for returns that are far lower, he explained.

A panel of experts from the world of risk management and transfer questioned however whether the alternative capital would stay in the insurance market over the long term and not exit once traditional investment options deliver more favourable yields.

John Nagle, Chief Executive of Lumley Insurance, agreed that the potentially flighty nature of the alternative capital might be an issue for top management and board members. But he added it could be used creatively, particularly if core risks are covered by traditional insurance. "It depends what you are looking for out of this new capital. Maybe you can prove to the board that your core programme is covered with safer and traditional insurers and that you have an opportunity to try something different with this new capital", he suggested.

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