7 April 2014ILS

Convergence investors allocations rose eight-fold in decade

Investments by non-industry investors into the re/insurance space increased 800 percent in a decade, according to figures from Goldman Sachs.

The statistics provide some indication of the significance of rising levels of convergence capital and appear inDeutsche Bank’s latest Trend Lines report.

The report suggests that even small allocations from institutional investors have the potential to capsize the market – particularly in the property catastrophe space – and warned that the influx will necessarily demand re/insurers change their existing business models.

The findings chime in with those from the Economist, which found that four-fifths of insurance executives believe that their business will have to change in order to deliver adequate shareholder returns over the coming three years.

Deutsche Bank’s report also refers to findings from Moody’s, which argue that the influx of capital will provide opportunities to transfer tail risks into the capital markets and provide fee income for those firms able to act as managers for those risks.

While convergence capital will prove a challenge; there are evidently opportunities inherent in harnessing the influx of additional capacity.

The regulatory burden

The report found that the cost of regulation has been a significant headwind facing the sector, with issues proving particularly challenging in Europe.

According to a report by Deloitte quoted in Trend Lines, Europe’s largest insurers spent €4.9 billion on complying with new regulation in recent years, amounting to a one percentage cut in ROE, says Bloomberg.

The average cost of regulation per insurer is €200 million, with the cost of compliance due to rise still further.

Bermuda players who face the prospect of compliance with Solvency II and any emerging US regulatory regime are likely to be paying particularly close attention to the cost of regulatory compliance.