GLOBAL – An estimated 15%, or $35bn, of the global reinsurance market has seen investment from institutions including pension funds, according to the latest report from Willis Re.
The report, 'Capital Overflow', also noted that the volume of capital entering the market was increasing rapidly.
According to James Vickers, chairman, Willis Re International, cautious long-term investors such as pension funds were attracted to reinsurance by the lack of correlation with other asset classes.
"Throughout the financial crisis of 2008 and 2009, we clearly saw the delinking from any other form of economic activity, because performance depends on natural catastrophes," he said. "This type of reinsurance now has a track record to be taken more seriously."
Investments can take the form of a catastrophe bond issued by a special purpose vehicle (SPV), the cash paid being placed in a trust account which acts as collateral.
In addition to the coupon from the trust account, investors receive an additional coupon reflecting the risk taken. These capital bonds can be publicly traded, are priced according to technical models, and the vast majority have run until maturity.
However, demand was now outstripping supply, and many institutions are now entering the market by underwriting a fully collateralised reinsurance contract, Willis said.
Due to the volume of inflows, prices on deals, particularly in the US, have been falling, the firm said further.
According to the report, the new money is being viewed as a threat to traditional reinsurers, a number of whom are now moving ahead with the development of third party capital management propositions to offer their own skills and platforms as fund managers.
As a result, there was an increasing convergence between capital markets and the reinsurance industry, said Vickers.
"Capital markets used to buying capital bonds are now accepting collateralised reinsurance deals instead," he said.
Besides its low correlation with other asset classes, reinsurance enjoys a competitive risk-return profile, and a high degree of transparency, as the risks transferred can be modelled.
However, Vickers said investors should be aware that the reinsurance market was now being hit by conflicting pressures.
"In spite of the amount of investment in the sector, original policy prices are still going up and it is not easy to sell policies to individual insureds," he said.
"Furthermore," he added, "while returns are fairly decent at present, if wider economic activity picks up, will the investment still look attractive?"
For more on insurance-linked investments, see IPE"s special report on the matter in this month's magazine.