SEATTLE–Capital market investors may be directing money into reinsurance now, but they will not be staying around long if rates change, according to one brokerage firm executive, whose view is not universal.
The capital market interests "are just here while the rates are high," said Paul Karon, chief executive officer of the Minneapolis-based Benfield Inc., a subsidiary of Benfield Group, in an interview yesterday.
Mr. Karon and other brokers were on hand here to discuss reinsurance transactions with members of the Property Casualty Insurers Association of America, which gathered for its annual conference.
Another reinsurance broker, Bill Adamson, CEO of Carvill America, in a separate interview, offered a differing perspective, suggesting that the capital market investors' interest in reinsurance would have more staying power.
As an example of capital market interest in the reinsurance market, Mr. Karon pointed to the presence of Goldman Sachs, noting that they were busy taking on reinsurance risks and had hired away one of his staff for their operation.
He said the capital markets are also involved with catastrophe bonds, industry loss warranties and reinsurance sidecars.
While investment banks such as Goldman Sachs are writing direct or brokered reinsurance for primary insurers, Mr. Karon said he thought they did not represent a trend. He said they will serve to complement the traditional reinsurance markets, but pointed to certain drawbacks.
With investment banks, he said their transactions involve "road show" presentations and involved legal processing.
"With reinsurance, it's a phone call or an e-mail," he declared.
Mr. Karon went on to say that he expected, for the June reinsurance treaties being discussed here, the property rates on average would go up 20 percent after a "clean hurricane season."
Benfield, said Mr. Karon, has been active in the sidecar market with the creation of the Starbound sidecar, which provided Benfield customers with a $300 million limit of protection for clients who needed capacity.
Mr. Adamson, based in Chicago, said his firm prefers industry loss warranties, which provide coverage when there is an industrywide loss that reaches an agreed on trigger point that is certified by Property Casualty Services.
He said the carrier, a subsidiary of Bermuda parent Carvill Group, sees ILWs as being "more flexible…You can do it more quickly and it's a speedier way to get capacity."
In Mr. Adamson's view, capital market money is unlikely to leave the reinsurance market anytime soon because it represents only a small percentage of their assets and they like the diversification it offers.
Mr. Adamson said he thinks property reinsurance contract renewals will range between 20 percent and 40 percent higher, while casualty rates remain stable.
His firm's study of capacity shows that it is very tight in peak zones where there are high concentrations of risk, he said.
Carvill's analytics group has found that there is a $47 billion shortage of capacity, said Mr. Adamson. He noted that the new capital flowing into Bermuda start-up operations "doesn't make a dent" in the shortage.
Mr. Adamson noted that the current mild hurricane system, while reducing claims numbers, is unlikely to have much immediate impact on rates because one good year doesn't make up for the $80 billion insured loss registered during the past two hurricane seasons.
He also said he doubted that the light volume of storms in the 2006 hurricane season is likely to change recent catastrophe loss models that have been generated.
Mr. Adamson added that among his clients the largest frustration is "the ability to buy reinsurance at prices they can afford." Some, he reported, are retaining larger amounts of risk as a result, and "some have cut back on their portfolios."
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