Capital influx opportunity to service uninsurable risks says broker

Speaking at the annual GRC conference in Melbourne, Australia, Jason Disborough, Managing Director - Global at Aon Risk Solutions Australia, said if the risk industry can use the new capital smartly, long-term solutions to tricky risks can be delivered. A panel of experts from the world of risk transfer noted that harnessing the new capital to ensure it stays in the insurance market will not be easy, adding that top management is likely to be wary of transferring risks via a potentially transient form of capital. But speakers at the event jointly held by the Risk Management Institution of Australasia (RMIA) and the GRC Institute were generally optimistic about the opportunity afforded by the new capital and its potential to boost transfer options.hideMr Disborough said alternative capital supplied by the likes of pension funds, life insurers, hedge funds and private equity firms searching for better returns on investment is driving fundamental change in the risk transfer industry. These sources of capital are attracted to the insurance market because traditional fixed term interest products and investments are only generating returns of around 1% to 2% at best, he noted during the Insurance and Risk Financing workshop. Whereas traditional insurers and reinsurers have been prepared to underwrite risks to generate a return on capital from anywhere between 10% and 16%, the alternative capital providers are prepared to enter the risk transfer market for returns that are far lower, he explained. The new money wants to compete with the traditional market and the industry now stands at a point of critical convergence, he added. According to Mr Disborough, the total of alternative capital in the market stands at $44bn. It is 'jumping the firebreak' between reinsurance and insurance and creating new challenges for the traditional underwriting model, he said. "For you as primary insurance buyers I think this signals a very exciting time. Potentially it might mean that insurance pricing will stay relatively flat as competition for your business will increase. But if this capital that comes into the market can't do anything quickly in traditional insurance lines it will probably exit. This means it will probably look to underwrite new and emerging risks, which presents an opportunity for risk advisers and most importantly for buyers to explore new and emerging risk categories where solutions may become available," said the broker. "I see it as a wonderful opportunity to use this capital more innovatively around emerging risks and try and design solutions that are more relevant to organisations," he added. A panel of experts from the world of risk management and transfer questioned however whether the alternative capital would stay in the insurance market over the long term and not exit once traditional investment options deliver more favourable yields. "There is a question as to the extent to which that capital will remain available," said Kerry McGoldrick, Enterprise Risk Manager at Woolworths Ltd. This raises questions over how organisations will perceive the alternative capital and use it in risk transfer. "The nature of the risk transfer then becomes pivotal. For a long-term programme I think the board and executives might be concerned that the capital will move at some point, so I suspect they will be less enamoured with that option than they might be for capital that is required over shorter-term risks of one, two or three years," added Mr McGoldrick. John Nagle, Chief Executive of Lumley Insurance, agreed that the potentially flighty nature of the alternative capital might be an issue for top management and board members. But he added it could be used creatively, particularly if core risks are covered by traditional insurance. "It depends what you are looking for out of this new capital. Maybe you can prove to the board that your core programme is covered with safer and traditional insurers and that you have an opportunity to try something different with this new capital," he suggested. Aon's Mr Disborough agreed that ensuring the alternative stays in the market will be a 'real challenge'. "I think it is down to the risk industry to prove it can use that capital responsibly and cleverly, so it stays," he said. Fellow broker, John Saunders, Senior Vice President of Marsh Pty Ltd, agreed: "If we use it smartly, perhaps in areas that are traditionally not insurable, when the returns in other markets rise the capital providers might stay because we have generated a new business area where they can see they will be able to write these risks for the next 20 years." Fellow panel member Jason Dowling of Allianz said traditional insurers would likely follow the alternative capital into new areas of risk. "We need to see if this new capital can start to be utilised for new opportunities then we can dovetail behind. Therefore if it is here only for the short term, which I suspect it is, then rest assured smart insurers are going to be on their coat tails and provide that coverage. I do think this represents an opportunity for new types of policy," he said.

Capital influx opportunity to service uninsurable risks says broker

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