Non-traditional capital softening Australian reinsurance market: Marsh

The influence of non-traditional or alternative reinsurance capital from third-parties such as pension funds is spreading, according to insurance broker Marsh which cites inflows of new capital as a cause of the softening rate environment in Australia.

According to Marsh, buyers of corporate insurance in Australia are benefitting from one of the most competitive insurance and reinsurance market environments seen in years, with average premium rate reductions of 10% achieved in recent months. This trend is expected to continue through the first half of 2014, resulting in a buyers market for Australian insurance users.

The market has softened due to the influx of new capital which has flowed into the reinsurance markets, said Marsh, estimating the amount of new capital which entered the reinsurance market in 2013 as being almost AUD$10 billion.

The entry of this new capital, from non-traditional sources, into the reinsurance market has created a surplus which is fueling competition in Australia, said Marsh.

“Less-traditional investment sources, like pension funds and high net worth trusts, which are struggling to find strong returns in other asset classes, have been turning to the reinsurance market as an alternative investment,” explained John Donnelly, Asia Pacific Head of Placement at Marsh.

As you’d expect, property insurance business is most affected, with average rate reductions of 10% exceeded for certain buyers with a lower risk profile. Other industry segments such as real estate and infrastructure are seeing rates beginning to fall to levels last available prior to September 2001.

As in the U.S. market, which has been the most affected by the inflows of non-traditional capital from investors, insurance buyers have also been able to benefit from expanded policy coverage and the lifting of terms and conditions.

Donnelly told Best’s News Service; “We can expect the softening trend to continue until the reinsurance market starts to lose some of its capacity, which might only happen with a major catastrophe loss.”

Marsh also said that the Asia insurance market is also currently a buyers market, with rates at or near historic lows, again citing the continued inflow of capacity and capital into the region, lifting competition. Marsh said that property catastrophe insurance rates in Japan are back to pre-Tohoku earthquake and tsunami levels, while in Thailand they are back to pre-2011 floods levels.

So the increasing levels of alternative capacity from capital markets investors is having a knock-on effect on insurance markets globally, is the general message. With reinsurance capacity so high, and pricing so low, this trend will continue and corporates will reap the benefits of improved insurance pricing and terms until we see some sizeable loss events which turn markets.