Third-party capital to limit catastrophe premium rises in Australia

The inflow of capital from third-party and institutional investors, who are increasingly looking to regions such as Australia in search of new catastrophe reinsurance investment opportunities, is tipped to smooth the rate cycle for Australian insurance customers.

Australian newspaper The Age explains that local insurers have used rising catastrophe reinsurance rates as one of the reasons behind passing on price rises to their customers in recent years. That reason may not be relevant in future, as a well-capitalised reinsurance sector finds that alternative capital flattens the rate cycle.

New capital from institutional investor sources, such as pension funds, has been flowing into the reinsurance space. Increasingly it is looking for new opportunities and Australia is a region with reasonable well-modelled perils making it easier for third-party capital to access the regions catastrophe risks.

The Age quotes Willis CEO Dominic Casserley as saying; “We are seeing that around the world new capital is coming into reinsurance markets. They are taking a bet that the chances of serious losses to the particular risks they’re going to take are not that bad.”

Casserley explained that the influx of alternative reinsurance capital is also changing the way premiums react to large catastrophe events. Increased competition is making it harder for traditional reinsurance firms to hike rates after disasters, which Casserley said could make premium rises after catastrophes much more short-lived.

Casserley explained; “More and more around the world, where there will be a terrible disaster, you will see a spike in rates, and then lots of people, some of them in reinsurance companies, some of them not, will start running their models and say ‘well we’ve just had it, my model says the odds of another one have gone down a bit. What is interesting is that this global capital is tending to make this jump in rates often quite short-lived.”

The potential for reinsurance rate rises to be flattened somewhat by alternative capital is one of the issues that we will have to wait, until after a large loss event, to see how much of an impact it has to the markets cycle. It’s expected that catastrophe reinsurance rates will still spike, but for shorter periods of time and perhaps less dramatically, with new capital ready to pour into the market to replenish any capacity that is lost.

This should translate to some respite for insurance consumers, who also may experience slightly less dramatic premiums increases after major catastrophe events strike their country.