Soft market will not drive capital-led solutions for corporate risk buyers–Portugal

In recent years, non-insurance instruments, such as catastrophe bonds, have grown dramatically. They are seen as an alternative to traditional reinsurance as investors seek new sources of revenue growth in the low interest rate environment. There is talk that such capital will inevitably seek to put its money to work in the large corporate sector, probably via captives. But participants of the roundtable organised by CRE and Apogeris, Portugal’s risk management association, in Porto as part of our European Risk Frontiers survey, expressed doubts that financial players such as hedge funds will show the same willingness to pay large claims as traditional insurers do.hide“Capital markets are still too immature regarding the products that they offer as alternatives to traditional insurance,” said Jose Luis Amorim, Risk Manager at Sonae, the retail, telecoms and financial group. “We have taken a look at cat bonds, but we did not get enthusiastic about the conditions. I believe it is a very opportunistic kind of capital,” he added. “Insurance companies have their defects, but they are a stable sector of the economy, and have managed to protect themselves better than banks. So opting for products offered by people who do not manage risks very well as an alternative to companies that traditionally make their living out of assessing risks does not look like added value,” concluded Mr Amorim. The risk managers argued that traditional insurers may take their time to settle a claim, but they understand that this is part of their business. “Insurers do not like to pay claims, but they are aware that sometimes they do have to do it,” Mr Amorim said. “Once they are convinced that the loss took place, the cause and effect relationship is clear and the value of the damage is defined, they will pay it. A hedge fund does not have the same perception that a loss may have to be paid. Their only perception refers to profitability and the stop loss clause,” continued Mr Amorim. For many companies, the search for new ways to transfer risk has become less urgent during the long running soft market. Rates are at attractive levels and forcing insurers to offer improved conditions and more innovative solutions to attract buyers. According to Portuguese participants of our European Risk Frontiers survey, there is little, if any, chance that this situation will change in the short term. “In the past year, loss ratios at insurers were not high. At the same time, large amounts of capital continue to flow into the insurance market as interest rates remain very low,” Mr Amorim said. “So I believe the trend is for rates to suffer further reductions in the near future.” Problems over capacity and rates can only be found in a few specific insurance lines, the Portuguese risk managers reported. One tricky line of business is credit insurance. This cannot be easily secured for some markets that have become important for Portuguese companies in recent times. “Credit insurance is an issue in the market today,” Mr Amorim said. “There is a lack of capacity in the segment.” “In Latin America, credit insurance has become a challenge,” agreed Santiago Martín, General Manager at HDI-Gerling in Spain. “Foreign companies that participate in large infrastructure projects need to insure the totality of the project. It is very difficult to find credit insurance to meet this requirement. There are few insurers working in the segment, the capacity of the market dries out very quickly and there is a lot of demand,” the insurer explained.

Soft market will not drive capital-led solutions for corporate risk buyers–Portugal

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