Billions in New Capital to Flow into Global Market

November 15, 2001

Between $10 billion-$20 billion of new capital will flow into the global insurance market over the next six months, with the bulk going into the reinsurance industry, Standard & Poor’s reported.

“We have already seen proposals for a number of new companies, bringing more than $5 billion in new capacity to the market, and more are expected to surface in the next six months,” said Donald Watson, a director of Standard & Poor’s Financial Services Ratings in New York. “With existing market participants also having filed to raise more than $15 billion in new capacity, and the first $4 billion expected before mid-2002, even at this early stage the capital inflow looks set to be significant.”

Of the $10 billion-$20 billion expected, more than one-half will be used to fund start-up ventures, reflecting, in part, the continued hesitation among institutional investors to invest heavily in current insurance companies until they can fully demonstrate their liabilities to the Sept. 11 terrorist attacks.

The first of the start-ups have already been launched, with the majority of those that are still in the pipeline likely to follow before the end of the year, in order to take advantage of the January renewals. “New investors are keen to enter the market as they hope to exploit the opportunities presented by higher rates and the scramble for insurance coverage before current coverage expires,” commented Watson.

He warned, however, that not all investors will look at the market as a long-term investment: “Hot money is clearly a factor. There is a danger that one year from now, investors will find that the momentum has gone from the insurance industry, and will seek out new investments.”

The influx of capital into the industry remains paramount, however. Without it, the expected demand for insurance and reinsurance could result in underwriters risking too much of their remaining capacity or trimming back on some classes of business. Rates would be forced to rise even further and the cost of reinsurance could become prohibitive, causing major problems for the global economy.

The growing number of start-up companies will prove particularly effective in tempering rate increases. As few start-ups have sufficient financial data, management track record, or business plans to attain investment-grade ratings, their capacity will tend to be more affordable to potential buyers of insurance than much of that currently in the market. “When it comes to a choice between two carriers with similar pricing, the highly rated company will be favored because that insurer provides a more stable source of capacity. The result is that start-ups will have to discount business to lure the customer away,” Watson said.

Many of the start-ups are likely to take advantage of low-tax domiciles, although new capital will flow into the industry everywhere, given the expectations of higher returns. “Even Australia, which has had its image as a reinsurance domicile tainted after a number of failures during the last market cycle, is likely to see its share,” Watson added.

Ireland and Bermuda, as low-tax domiciles, will feature significantly.

“A critical mass of talent has built up in Ireland, and the region has much to offer start-ups. Bermuda will also see a healthy influx, with its one-hour time lead over New York working in its favor. Nevertheless, start-up reinsurers are unlikely to fare as well as in previous market turns due to the strong level of capacity that remains among property/casualty insurers and reinsurers,” Watson concluded.

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