January 02, 2013

The entry of new investors like hedge funds into the reinsurance market is likely to keep prices mostly flat when European customers renew policies in January, despite the industry's losses from superstorm Sandy, broker Willis Re said.

The U.S. reinsurance broker said on Wednesday the industry, which takes on risk from insurers, would suffer up to $25 billion in losses from superstorm Sandy and that would ensure prices for property reinsurance stabilise after years of falls.

A surge in claims typically supports reinsurance prices by forcing less well-capitalised players to retrench, freeing those still in the market to charge more.

But an influx of fresh capital from new entrants into the industry, like hedge funds, would offset this, Willis Re said.

Last year saw a spate of increased interest from hedge funds in the reinsurance sector which, apart from superstorm Sandy, had a relatively quiet year in terms of costly catastrophes. These included big-name hedge fund managers like Dan Loeb, Steve Cohen and John Paulson.

HUGE MARINE LOSSES

Reinsurers writing marine coverage were hardest hit by Sandy, as the storm which ravaged the U.S. east coast in October damaged yachts, pleasure crafts, cargo and imported cars.

While prices for marine insurance are likely to increase by up to 10-15 percent, there "are no signs of attempts at blanket rate increases," across all reinsurance lines, Willis Re said.

Price changes are likely to remain muted until the industry suffers a huge loss which fundamentally challenges its perception of risk, say brokers and reinsurers.

Willis Re said the $20-$25 billion insured loss estimates for Sandy are expected to change due to uncertainty from the modeling companies which determine the scale of losses that insurers and reinsurers are exposed to after a natural disaster.

This uncertainty could take years to decipher and the result could be different from insurers own assumptions on the damage.

"Superstorm Sandy has yet again demonstrated the danger of overreliance on catastrophe models," Willis Re said.

Between the losses to private insurers and to the federal government, Sandy is expected to be the second costliest natural catastrophe in U.S. history, behind only hurricane Katrina.

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