Unprecedented convergence of capital will continue to impact insurance markets

Capital inflows affecting insurance markets: Aon

“An influx of capital from non-traditional sources is contributing to increased market capacity, lower premiums, and effectively enhancing competition in the global insurance industry.”

Commenting on insurance markets in 2013, Jason Disborough, Managing Director, Global, for Aon Risk Solutions, global provider of risk management, insurance and reinsurance brokerage, said that the market conditions that increased competition between insurers and lowered premiums across the board this year was likely to continue into 2014.

Mr 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.

Mr 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.

James Baum, Managing Director of Broking & Chief Broking Officer, Pacific for Aon, also had some comments on the industry response to these changing financial dynamics, pointing out that when market conditions are challenging, it behoves insurers to innovate in order to maintain growth. And, he said, there are some key areas calling out for innovation in Australia.

“Australia is lagging behind the rest of the world in a number of areas. Network security and cyber risk, for example, have been seen as ‘emerging’ risks for far too long. The fact of the matter is that these risks are here now, and require a better and more coherent response from Australian insurers.”

Mr Baum went on to comment on the link between the themes emerging from Aon’s 2012/13 Australasian Risk Survey and the identifiable trends in insurance markets in 2013.

“Insurance exists to mitigate risk but at the same time, it is clearly not possible to insure against all risks,” he said. “We saw this very much reflected in the Aon risk survey. The number one risks identified by Australasian corporates, namely ‘brand and image’, and the ‘market environment’, are not risks that insurers can comprehensively address in the short to medium term.”

On the other hand, business interruption and human resources, which were ranked three and five respectively, are areas where insurance can offer real protection, and where insured’s and insurers alike need to concentrate their risk mitigation efforts.

“Workers Compensation, for example, is the single biggest insurance expense faced by businesses, so it’s no surprise that it ranked as the fifth highest risk concern. It really needs to be monitored and managed well on an ongoing basis.”

Mr 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.