Liquidity crisis still poses barrier to entry for capital in the reinsurance industry

If there was a major catastrophe loss in today’s marketplace it’s unlikely that the reinsurance industry would be able to raise new capital following the event to the same extent that it did post hurricanes KRW in 2005, delegates of the National Insurance Conference of Canada were told.
During the panel discussion ‘Global Reinsurance – Back to Basics,’ Tad Montross, president and CEO of Gen Re, said that over the past two or three decades the barriers to entry into the reinsurance industry have dropped significantly, and the industry has seen “tens of billions of dollars, mostly from private equity firms and hedge fund activity that have come in to fund different measures.”
Following KRW many Bermuda-based reinsurers lost on average between 25% and 30% of capital, he continued.
“Most of that was re-generated within weeks of the events,” he said. “That post-event capital raising is very unlikely in today’s marketplace.”
The reinsurance industry would likely see capital enter the industry in different formations, he added. “Sidecars have become a very efficient way for capital to come in on a very short duration basis, without having to build up an infrastructure,” Montross said.
“Certainly securitization is a form of capital entering the industry, and to the extent that demand is there, I believe we will see an increase in securitization as well.”
Fellow panel member John Berger, president and CEO of Harbor Point Re, added that while it appears that the liquidity crisis of 2008 has eased in 2009, the market is still very precarious.
“I’m very uncertain that if big cats had happened last year when there was a liquidity crisis around the world there would have been anyone that would have come in,” Berger said.
“This year it seems that things have freed up a bit, but I don’t think we are out of the woods on the financial front.”