Raising capital a serious barrier in today’s reinsurance market

Reinsurers may not find appropriate capital to cover claims should a major catastrophe hit, said a panel of reinsurance C-suite decision makers during a panel at the National Insurance Conference of Canada (NICC) that ended in Ottawa on Friday Oct. 2, 2009.Tad Montross, president and CEO of Gen Re, told the NICC delegates that over the past two or three decades the barriers to entry into the reinsurance industry have dropped significantly.This has prompted an influx of “tens of billions of dollars, mostly from private equity firms and hedge fund activity that have come in to fund different measures,” in an effort for capital markets to enter the insurance and reinsurance sector.

As a result, the ability for the reinsurance industry to raise new capital, following a major catastrophic event, has been sorely compromised, explained Montross.

After the devastating hurricane season of 2005, many Bermuda-based reinsurers lost an average of 25% to 30% of capital, said Montross. “Most of that was re-generated within weeks of the events.” What concerns Montross is “That post-event capital raising is very unlikely in today’s marketplace.”

An innovative and responsive industry, many reinsurers have developed other methods of attracting capital. For example, sidecars “have become a very efficient way for capital to come in on a very short duration basis, without having to build up an infrastructure,” Montross said.

“Certainly securitization is a form of capital entering the industry, and to the extent that demand is there, I believe we will see an increase in securitization as well.”

Fellow panel member John Berger, president and CEO of Harbor Point Re, added that while it appears that the liquidity crisis of 2008 has eased in 2009, the market is still very precarious.

“I’m very uncertain that if big cats had happened last year when there was a liquidity crisis around the world there would have been anyone that would have come in,” Berger said.

“This year it seems that things have freed up a bit, but I don’t think we are out of the woods on the financial front.”

Originally published on CITopBroker.com on October 2, 2009

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