Pension fund interest will erode margins in cat

The interest of pension funds in catastrophe risk is here to stay and will result in the erosion of margins on cat lines. In response, the industry needs to look to new risks.

That was the view of Stephen Postlewhite, group chief risk officer at Aspen, speaking at RMS’ recent ‘world tour’ seminar in London. He said that convergence capital has already had “profound impact” on the industry, adding that its share of cat business—and its impact on that line—is only likely to increase.

Postlewhite said that convergence capacity will be between 20 and 45 percent of the share of cat business by 2020, with cat risks in the US “likely to be at the upper range of that figure”. He predicted sustained interest from the pension funds, with significant implications for cat pricing.

While the industry expects to be paid a premium for cat business, pension funds allocating only a tiny proportion of their portfolio to cat risk are happy with a far lower price, said Postlewhite. With $30 trillion of assets, pension funds have the potential to flood that part of the market with capital, he said.

Mike Duffy, CEO global property at Canopius, added that the industry has to adapt to a new norm around cat pricing. “The margins on that business have frankly been unsustainable. We can continue to write that business, just not at the margins we have been used to. Finally, the game is up”.

As such, the industry needs to look to new risks. Postlewhite said that the industry has to build out its capabilities and capture some of those risks that aren’t presently insured.