So long as reinsurers are charging an adequate price for catastrophe risk, they have no need to worry about capital market investors coming in on their act

There was a time when the capital markets were considered a complement to traditional ultimate net loss reinsurance. However, some executives of traditional reinsurers feel that capital markets investors have started to encroach on their territory. Investors are increasingly stepping in to set up catastrophe funds or sidecars to capitalise on perceived capacity shortages.

A prime example is the Florida homeowners’ market. Demand was expected to be particularly high at 1 June, because the consensus is that, after a few benign years, Florida is due a hurricane. As a result, a number of capital markets-backed vehicles have come in, and there has been some disappointment with the low level of rate rises in that market.

Investors are being attracted to the reinsurance market because there are scant opportunities to invest elsewhere, given the current financial crisis. Reinsurance is, in some places at least, in demand and lucrative when prices are right. If there is another benign year in Florida, investors stand to make a lot of money, as the state’s property-catastrophe rates on-line are among the highest in the world.

Reinsurance is, in some places at least, in demand and lucrative when prices are right

As an example, one only needs to look at what happens to catastrophe specialists’ combined ratios when losses are mild. RenaissanceRe’s combined ratio was a tiny 29.4% in the first quarter of 2012.

So should traditional reinsurers feel threatened? Some do, but perhaps companies should take a more measured view. Capacity has always flowed in where opportunities are perceived. What happened in Florida this year was no different.

As long as companies charge what they consider to be an adequate price for the risk they are assuming, they should be fine. They may lose some business to cheaper newcomers, but if there are really large losses and the newcomers have underpriced, that business will soon come back.

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