New EU rules set to boost reinsurance and securities issues

City A.M. Reporter
New EU rules to boost insurers’ financial strength will spur more issues of securities tied to natural disasters and peak mortality risks as the sector moves onto even safer footing, Swiss Re said yesterday.

The world’s second-biggest reinsurer and other industry experts expect the Solvency II capital regulations – set to take effect in 2013 – to support insurance-linked securities (ILS) given insurers’ need for robust balance sheets.

Solvency II will have a positive effect on more mature ILS products such as catastrophe bonds, Alison McKie, managing director in Swiss Re’s life and health area, said.

In addition to the traditional reinsurance market, insurers use “cat” bonds to transfer risks associated with disasters like huricanes and earthquakes to capital markets investors, thus limiting exposure to major damage claims.

Capital market solutions mitigating risks were not assessed under the previous regulatory system, but they will be under Solvency II, McKie said.

“Securitisation is an effective way of managing these peak risks and reducing capital requirements. Overall, we therefore expect the new regulations to lead to an increase in the use of alternative risk transfer products, in particular by those companies who are using internal models to assess their capital position,” she added.

Top reinsurers such as Munich Re, Hannover Re and Swiss Re expect sales to rise as insurance companies buy risk cover from them to help offset Solvency II’s more stringent capital requirements.