U.S. pension funds have been key in boosting the global reinsurance market's capital base and helped reinsurers pay insurer claims arising from major disasters such as 2011's earthquake in Japan and 2012's Superstorm Sandy, according to the Casualty Actuarial Society.
Pension funds and other institutional investors have been drawn to property catastrophe bonds, which can pay out annual investment returns of 7 percent, rather than 10-year Treasury bills, which offer per annum payouts in the 2-percent range, according to Meyer Shields, a Fellow of the Casualty Actuarial Society and P&C equity research analyst at investment bank Keefe, Bruyette & Woods.
Shields participated in the opening session of the Casualty Actuarial Society's annual seminar on reinsurance, along with Joseph Sieverling, SVP and director of financial services for the Reinsurance Association of America, and Christopher Schaper, president of Bermuda-based Montpelier Re. The session, titled "A 360-Degree View of the Reinsurance Industry," was moderated by Bruce Fell, a managing director at Towers Watson.
"Reinsurers' ability to draw new investors, and raise rates on its customers after losses occur in their property catastrophe lines, enabled them to weather the economic turmoil of 2008 and 2009 as well as the natural catastrophes of 2011 and 2012," Shields stated. He acknowledged that some might question why a 64-year-old, on the verge of retirement, has his or her pension fund investing money on whether the ground is going to shake next year in California.
Pension fund investments in reinsurance are a significant development because "their outlook is much different. [Pension funds] don't need double-digit percentage returns," said Sieverling. Hedge funds are generally known for making quick entries and exits, into and out of the reinsurance marketplace whereas pension funds take a much longer view of things, he observed.
"The property catastrophe business has been a relatively profitable line of business," said Christopher Schaper, president of Bermuda-based Montpelier Re. "I think people understand you have to have the price to outrun the losses," alluding to reinsurers' ability to raise their premiums in lines where reinsurers have had to pay out significant monies to insurers.
Schaper said that, beyond helping insurers spread the risk they incur after a natural disaster, reinsurers play a significant role in many lines including areas such as aviation and terrorism insurance markets, and are looking to expand their presence in other fields such as flood insurance, which today is dominated in the U.S. by FEMA's National Flood Insurance Program (NFIP).
Yet while there has been a substantial supply of reinsurance in the marketplace, and reinsurers have been able to secure higher premium rates when needed, there has been comparatively low growth in reinsurance demand.
The primary reason for the excess supply of reinsurance, the panelists agreed, is that the purchasers of reinsurance are themselves in a strong capital position, and have chosen to retain more of the risks they've underwritten on their own books. Moreover, should insurers choose to merge and/or acquire one another in the future, this development could adversely impact reinsurers even further, with a reduced number of insurers purchasing reinsurance.
And while there's reason to believe higher interest rates could boost reinsurers' investment income, this otherwise positive trend could be offset by higher inflation rates, which increase reinsurer claim payouts, the panelists noted.