Pension and hedge fund capital pushing down premiums

Pension and hedge fund capital pushing down premiums | Insurance Business

Pension and hedge fund capital pushing down premiums
An influx of capital from non-traditional sources is contributing to increased market capacity, lower premiums, and greater competition in the global insurance industry, according an Aon boss.

Commenting on insurance markets in 2013, Jason Disborough, managing director, global, for Aon Risk Solutions said that the market conditions that increased competition between insurers and lowered premiums across the board this year was likely to continue into 2014.

Disborough said that increased capital flows into the industry from non-traditional sources has resulted in a convergence of traditional and non-traditional capital, translating into excess capacity which insurers have been unable to absorb through organic growth.

“Funds are flowing into the insurance sector from major pension and hedge funds as well as family trusts in a way we haven’t seen in the past,” he explained. “In the current low interest rate environment, these investors are seeking alternative sources of return. In addition, they have been willing to accept lower rates of return than have been usual in the industry. Because their investment has the potential to dwarf traditional sources of capital, it has the ability to fundamentally change market dynamics.”

Softening market conditions and increasing capacity have seen premiums fall almost across the board, with downward pressure on rates being experienced even in some of the poorer performing product classes.

Disborough said that while this was great news for insured’s, it continues to present real challenges for insurers.

“Many are no longer able to rely on growth from their existing book of business, and need to look at new ways of maintaining profitability,” he explained.

Disborough concluded by looking forward to 2014, saying that he did not expect general economic conditions to pick up significantly, at least in the short term, and that alternative capital flowing into insurance markets would continue to keep competition alive and well.

“All in all, insurers and reinsurers alike are facing challenging times ahead, not just because of the ongoing impacts of natural catastrophes, but also due to less favourable operating conditions. On the other hand, their customer’s total cost of insurable risk will continue to benefit,” he said.