In a new report Towers Watson has recommended that investors review their strategic allocation to reinsurance as a form of diversification, despite falling premiums and rates standing at the low end of the historical range.
The report shows that premium rates are lower due to claims being at a low enough level for the majority of losses to be retained by primary insurers. As a result, reinsurance capital reserves have increased.
Combined with positive returns on these reserves, a downward pressure on premiums as a strong cyclical supply of reinsurance capital requires a lesser risk premium to encourage it to be put at risk, according to Towers Watson.
The report states: “Whether premiums will stay low or fall further depends on the potential for the current low rates to attract new demand for reinsurance capital. Alternatively, a significant catastrophe event could also reduce capital quickly, leading to higher rates again.”
According to Towers Watson, managers with “scale and good access” will be best placed to seek opportunities with the highest risk-adjusted returns.
While a significant catastrophe could change things, the trend is for higher premiums and more attractive prospective returns, as far as the report is concerned.
