Swiss Re Ltd., the world’s No. 2 reinsurer, doesn’t see near-record capital inflows to the reinsurance market from new investors such as pension funds causing systemic risk.
“If you detach the actual risk takers too much from those who understand it, I think there is a risk, but so far it’s very limited,” Christian Mumenthaler, head of Swiss Re’s reinsurance business, said in an interview in Monte Carlo yesterday. “If there is a big loss, pension funds would have an invisible hit as they only allocate a very small fraction of their capital, so I can’t see a systemic component.”
The insurance industry must avoid systemic problems that arose in the banking industry during the financial crisis, when capital became detached from underlying risks, John Nelson, chairman of Lloyd’s of London, the world’s oldest insurance market, said in a speech last week. Some structures being used could undermine qualities of the insurance model, which provides a “secure and reliable risk transfer market for specialist risk,” he said.
The reinsurance industry may attract about $100 billion of new capital from sources such as pension funds and hedge funds over the next five years, according to Aon Benfield, the reinsurance broker of Aon Plc. Capital accumulated by reinsurers stood at a near-record of $510 billion at the end of June, according to the broker.
“You could start to see a systemic risk emerging if a lot of pension funds allocate money into catastrophe reinsurance at all costs and somebody is just an intermediate and says ‘OK if you’re sure I do it,” Mumenthaler said. “But that’s not how the market is today.”