Despite catastrophe-induced losses in the first half of 2013 that exceeded the 10-year average, interest in the reinsurance marketplace remains robust, even to the point of drawing words of caution from Amlin’s chief executive. In response to the injection of capital and intensifying focus on insurance-linked securities (ILS), Charles Philipps recently voiced his concern that a lack of restraint from fund managers would further dampen rates of return, which would also quell the initial optimism and confidence of investors.
Amlin incurred a drop in profits for the first six months of the year compared to the same period in 2012, a result attributable primarily to heavy rainfall and flooding that wreaked havoc in parts of Central Europe. Germany saw the destruction of hundreds of homes, as well as severe damage to infrastructure such as roads and railways. Reinsurance giant Munich Re anticipates the flood damage will prove to be the costliest natural disaster in the country’s history. The same series of weather events, which hit Slovakia, Hungary and neighbouring Austria, were responsible for the most significant damage in terms of cost for the first half of 2013.
Munich Re also recently reported a profit downturn relative to 2012’s first-half statistics. Similarly the flooding in Europe played a major role, but the company’s chief executive, Nikolaus von Bomhard, named increasing competition and a supply-and-demand ratio favouring reinsurance buyers as contributors to the company’s underwhelming results.
Hedge funds and pension funds have been turning to insurance-linked securities and the reinsurance market for stronger returns, which have been elusive in traditional, asset-correlated markets. Catastrophe bonds, or cat bonds, have attracted interest from investors looking to diversify their portfolio and spread risk, but some analysts worry that these investors lack a firm understanding of the risk involved with the insurance-linked securities market, and particularly with cat bonds. A relatively untested market has yet to yield much in the way of comparable or actionable data and it remains to be seen how newer investors, those who haven’t experienced some of the major losses inflicted by catastrophic events in recent years, will react.
Posted: Monday, October 7th, 2013