Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The insurance industry needs to attract $1tn in investment from private equity firms and other big investors to plug gaps in cover for natural disasters and cyber attacks, says the head of one of the world’s largest brokers.
“If we don’t bring in a trillion dollars in alternative capital in the next decade, we’ve failed,” Aon chief executive Greg Case told the Financial Times.
Insurance covered less than one-third of the cost of natural disasters since 2000, according to Aon, part of a “protection gap” between insured losses and actual costs as asset values have grown, climate change has intensified storms and traditional insurers have hit the limits of their risk appetite.
Insurance has started to attract investment from investors such as sovereign wealth funds and pension funds seeking to diversify their returns, because losses from events such as big hurricanes and cyber attacks are generally uncorrelated with the stock market.
But Case predicted investment in the sector would double in the next five years.
“To the extent we can access other pools of capital, in addition to insurance capital . . . we want to bring as much in as we can, to offset the volatility that our clients face.”
Hedge funds, sovereign wealth funds and rich individuals have piled into insurance risk through catastrophe bonds — which offer double-digit returns in exchange for agreement to pay out in the event of a disaster — and specialist investment funds.
These and similar vehicles have attracted more than $115bn in alternative capital, according to Aon.
But Case said there was scope for significant further growth as demand increases from companies seeking cover against rising losses from natural catastrophes and cyber incidents, while traditional insurers cut back on coverage for individual clients to help spread their risk exposure.
Private capital firms have started supplying capital through other structures in addition to catastrophe bonds and specialist investment funds.
In December, the US insurer AIG announced a new $715mn entity designed to cover it against some of the more unlikely risks in its portfolio, using Blackstone-managed funds.
Case said rising volatility means the industry must redouble its efforts to help alternative investors assess and understand the risks, even as it has created greater demand for insurance.
“If we don’t understand it, you don’t put your capital behind it,” he said. Insurance investment performance had varied in recent years, he added.
“The best have done exceptionally well,” he said, but “capital asks, is the volatility worth it?”
