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Jason Disborough, Managing Director - Aon Global at Aon Risk Solutions, said if the risk industry can use the new capital smartly long-term solutions to tricky risks can be delivered.
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.
Speaking on the opening day of the conference, Mr Disborough 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 per cent to 2 per cent 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 per cent and 16 per cent, 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.
Aon's Mr Disborough agreed that ensuring the alternative stays in the market will be a 'real challenge'. "I think it is down to the risk industry to prove it can use that capital responsibly and cleverly, so it stays", he said.
Fellow broker, John Saunders, Senior Vice President of Marsh Pty Ltd, agreed: "If we use it smartly, perhaps in areas that are traditionally not insurable, when the returns in other markets rise the capital providers might stay because we have generated a new business area where they can see they will be able to write these risks for the next 20 years".