Peak Re points to Asia as a growth area for reinsurance-linked investing

The insurance and reinsurance-linked investing space is always going to be on the look out for two things as it grows. Firstly, where extra capacity will come from to satisfy the demand of institutional investors from the capital markets who want to put money to work in the insurance, reinsurance and catastrophe risk space. Secondly, diversification, a much-needed factor that is going to become more and more of a focus as the reinsurance-linked investment market expands.

The announcement today about the launch of a new reinsurer, aiming to become one of the dominant suppliers of reinsurance capacity to the Asian primary insurance market, demonstrates one area where this growth of capacity and diversity is destined to come from. The launch of new reinsurer Peak Re with $550m of capital looks set to help the gradual growth of this region as a major reinsurance market and will likely stimulate interest in the region as a destination for capital markets capacity from investors.

The launch of Peak Re is interesting, not just because it shows the opportunity which could be embraced by investors and those looking to operate and manage reinsurance-linked investment funds and operations, but because it’s backers are an interesting bunch.

Fosun Internation Limited, a huge Chinese investment and industrial firm, are the key backer of Peak Re having put in $468m of the reinsurers initial capital. Fosun are well-known globally and have always had aspirations to model themselves on Warren Buffett and his firm Berkshire Hathaway. Buffett generates the lions share of his profits from his reinsurance interests and Fosun appear to be positioning themselves to profit from reinsurance premiums in a similar way.

The other key investor in Peak Re is the IFC, part of the World Bank Group, who are making a $82m equity investment in Peak Reinsurance Company Limited, as they seek to help expand the availability of quality insurance services in Asia. By backing a reinsurer which has aspirations to become one of the regions leading players the IFC will indirectly help to support local primary insurers in need of reinsurance protection.

“Increased insurance coverage is important to sustainable business growth and private sector development,” said IFC’s Asia Financial Markets Director Serge Devieux. “Supporting the emergence of strong regional reinsurers such as Peak Re will enable local insurers to expand their products and services and reach more clients.”

Franz Josef Hahn, former head of China at Swiss Re and now chief executive officer of Peak Re, commented; “The strong financial and technical backing of Fosun and IFC has been critical in making Peak Re a reality. As top-quality founding shareholders, they provide a superb blend of support that enables Peak Re to develop in a competitive and sustainable manner.”

IFC work with Fosun on a number of other initiatives which they support to enable better access to key services and sectors within Asia.

For Fosun, the motivations are clear, they see reinsurance as a way to create a new revenue stream to support their growth aspirations. Reinsurance premiums look set to become one of their major sources of income and we expect they will reinvest in Peak Re to build capacity going forwards.

“Together with Fosun’s other insurance projects, our investment in Peak Re will create an anchor revenue stream from the insurance business to support our investment activities and transform our business into a world-class investment group in five to 10 years’ time,” commented Guo Guangchang, chairman of Fosun and director of Peak Re.

Peak Re, headquartered in Hong Kong, will reinsure both natural catastrophe and general insurance business around Asia, aiming to reach around 100 primary insurance clients across 7 emerging Asian markets such as China, India and Indonesia over the next five years. They hope this will support the local insurance industry and enable it to expand more rapidly to keep up with the lack of insurance cover and underinsurance issues which are apparent across Asia.

Peak Re has aspirations to go global as well, an article in the FT today quotes Wang Qunbin, president of Fosun, as saying that they would like to make Peak Re a leading global reinsurer and that also aim to become a leading global investment firm akin to Berkshire Hathaway, although he stressed they don’t intend to copy Buffett. He also said that a reinsurance group could become as important to Fosun as it was to Berkshire in future.

This launch of a new reinsurer with global aspirations in Asia may be just what the reinsurance-linked investment space needs to spur it on to think more deeply about Asia as a market it should be turning its focus towards. The opportunities to profit from reinsurance premiums in Asia are only going to grow, as penetration of insurance rises (supported by availability of reinsurance), risk models improve for the region and local financial regulations support insurance and reinsurance business better. Catastrophe bonds are likely to be issued with Asian perils as the region comes up to speed with risk modelling and reinsurance and the capital market investment community are an obvious source of capital which could support this development of a re/insurance market.

Asia supports the two factors we mentioned at the start of this article, new capacity for investment capital interested in reinsurance and diversification opportunities by underwriting Asian peak catastrophe risks. Could we see reinsurance-linked investment funds with a focus on Asian catastrophe risk as an asset class? It’s certainly possible and the potential to profit from an Asian reinsurance investment market could be too attractive to miss out on for some investors and for the reinsurers looking to manage third-party capital to underwrite reinsurance risks.