Global capital may limit premiums

Institutional investors are increasingly keen to take on risk held by Australian insurers via reinsurance markets, in a trend that is tipped to limit premium rises after severe natural disasters.

Institutional investors are increasingly keen to take on risk held by Australian insurers via reinsurance markets, in a trend that is tipped to limit premium rises after severe natural disasters.

When justifying hefty price rises in recent years, Suncorp and IAG have laid part of the blame with the cost of reinsurance, which rose sharply across the region after the devastating New Zealand earthquake and Japan's tsunami disaster of 2011.

But Dominic Casserley, the chief executive of New York-listed insurance broking giant Willis, said significant new capital was now flowing into reinsurance markets, including in the Asia-Pacific region.

The new capital - which is often coming from large pension funds seeking out higher yields - is putting downward pressure on the cost of reinsurance.

"We are seeing that around the world new capital is coming into reinsurance markets," Mr Casserley said during a visit to Sydney last week.

"They are taking a bet that the chances of serious losses to the particular risks they're going to take are not that bad."

The trend, which could push down insurers' costs, comes after the Australian industry's profits have surged this year due to a benign environment for disaster claims.

Earnings at Suncorp's general insurance business jumped 79 per cent this year, while IAG's profits rose about 275 per cent after both companies paid out relatively little in claims.

Global insurer QBE, which earns about a third of its profit in the United States, is also likely to have benefited from what analysts say is the quietest American hurricane season in 45 years.

The influx of global capital into reinsurance markets is also changing how premiums respond to the most severe types of natural disasters, Mr Casserley said.

Increased competition of established reinsurance players was limiting their capacity to increase rates after disasters, he said. This would cause premium rises after catastrophes to be more "short-lived".

"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'," he said. "What is interesting is that this global capital is tending to make this jump in rates often quite short-lived."

Despite taking a severe toll on local communities, disasters including the NSW bushfires and Queensland flooding in 2012 did not have a large enough financial impact to change reinsurance costs, the company said.

Related Articles