Reinsurers have been struggling to find new capital since the start of the financial crisis and the picture is set to continue while the market for distressed debt yields greater returns. What are the wider implications of a lack of fresh capital for reinsurance and when will those investors return?
In the first of our contributions from reinsurance industry professionals, Hans-Peter Gerhardt says doubts persist over the market’s ability to recapitalise.
Capital in the reinsurance industry determines capacity for peak exposures. Any imbalance between supply of and demand for capital typically has an immediate impact on the pricing of large reinsurance programmes.
During the last 18 months, reinsurers’ capital available to bear risk has undergone a roller coaster ride, causing widespread anticipation of a severe capacity contraction and strong price increases.
As our sector recovered its capital position due to the recovery on the industry’s asset side, this hard market turned out to be nothing but an illusion.
Nevertheless, doubts continue to exist over our sector’s ability to recapitalise following a major catastrophe. Moreover, hedge funds – the main source of capital to sidecars – have either disintegrated or moved their investment focus to other areas.
Private equity funds – the traditional investor to start-ups – are finding themselves stuck in illiquid investments in the ‘class of 2005’, causing a huge potential overhang to the equity market for reinsurers and rendering the potential for newly created reinsurers extremely remote.
Thus there is good news and bad news: our industry’s capital base is intact and has weathered the storm – with a few exceptions – very well, but the potential for significant fresh capital appears to be very limited by historical standards.
Pricing in the reinsurance industry, however, should remain stable at current levels.
Hans-Peter Gerhardt is chief executive of Paris Re