Billions of dollars of new capital are entering the re/insurance sector, but will it dampen the upturn?

And still the ebb and flow of capacity in the re/insurance sector continues. Following years in the investment doldrums, re/insurance has now taken on a new lease of life and it seems the investment community just can't get enough stock.

Consensus opinion is that the current climate constitutes an “unprecedented market opportunity”, with surging interest from buyers of reinsurance and, despite the recent influx of capital, falling capacity supply. Where opinion becomes more divided is whether the new capital will flood the market early, stifling the potential of the hard market.

Overall, ABN AMRO estimates new capital of $24.5bn will enter the industry, but most of this will be replenishing old capital drained by the unusually high levels of catastrophe losses in the year, even before September 11 is taken into account.At the same time, there have been re/insurance industry collapses, such as Independent in the UK, Taisei in Japan and Fortress Re in the US, pulling capital out of the market. And several firms have decided to withdraw. Copenhagen Re has currently stopped writing, while Royal & SunAlliance has withdrawn completely from reinsurance underwriting.

On the plus side, there are some interesting movements of capital across the industry. In the middle of November, Munich Re announced it would inject more than $1bn into subsidiary American Re to enable it to take on new business as the market hardened. Lloyd's agency Goshawk has announced it is on a £100m fund-raising exercise to set up a new reinsurance subsidiary in Bermuda, at the same time adding another £35m to its Lloyd's capacity for the 2002 year of account. Another Lloyd's agency, Wellington, has also announced its intention to set up a non-Lloyd's insurance subsidiary, capitalised to the tune of at least £400m and backed by venture capitalists. In the same vein as Goshawk, Wellington is also upping capacity in its Lloyd's operation, which is expects to hit the £625m mark for 2002.

In fact, 2002 will be a bumper year for Lloyd's capacity, with a total of £12.3bn committed to underwriting, and more expected to enter the market in the first half of the year. Commenting on the highest ever capacity figure for Lloyd's, chairman Sax Riley said, “Clearly the market has emerged from the turmoil surrounding the events of September 11 in good shape. Our capital providers are voting with their chequebooks. Having come through a number of difficult years, they are now increasing their underwriting commitments as we enter a period of sustained growth. We expect to see the rise in business from all over the world, but especially in the US – which last year was our largest single market.”