‘Capital influx huge opportunity to service uninsurable risks’

The influx of alternative capital flowing into the risk transfer market has been described as a wonderful opportunity for corporate buyers and risk advisers to find solutions to emerging and previously uninsurable risks.

Jason Disborough, managing director – Aon Global at Aon Risk Solutions who made the observation during an insurance conference said in the short term it will also keep the cost of insurance competitive.

“If the risk industry can use the new capital smartly, long-term solutions to tricky risks can be delivered,” Disborough added.

A panel of experts from the world of risk transfer noted that harnessing the new capital to ensure it stays in the insurance market will not be easy, adding that top management is likely to be wary of transferring risks via a potentially transient form of capital.

But speaking at the event jointly held by the Risk Management Institution of Australasia (RMIA) and the Australasia Compliance Institute (ACI) they were generally optimistic about the opportunity afforded by the new capital and its potential to boost transfer options.

Disborough said alternative capital supplied by the likes of pension funds, life insurers, hedge funds and private equity firms searching for better returns on investment is driving fundamental change in the risk transfer industry.

These sources of capital are attracted to the insurance market because traditional fixed term interest products and investments are only generating returns of around 1 percent to 2 percent at best, he noted during the Insurance and Risk Financing workshop.

Whereas traditional insurers and reinsurers have been prepared to underwrite risks to generate a return on capital from anywhere between 10 percent and 16 percent, the alternative capital providers are prepared to enter the risk transfer market for returns that are far lower, he explained.

The new money wants to compete with the traditional market and the industry now stands at a point of critical convergence, he added.

According to Disborough, the total of alternative capital in the market now stands at $44 billion. It is ‘jumping the firebreak’ between reinsurance and insurance and creating new challenges for the traditional underwriting model, he said.

“For you as primary insurance buyers I think this signals a very exciting time. Potentially it might mean that insurance pricing will stay relatively flat as competition for your business will increase.”