John Cavanagh, CEO of Willis Re, spoke with Business Insurance Senior Editor Sarah Veysey at the Rendez-Vous de Septembre meeting in Monte Carlo, Monaco, about how the reinsurance industry is handling the flood of third-party investor capital. Edited excerpts follow.
Q: What are the challenges and opportunities for the reinsurance industry posed by convergence capital?
A: The challenge is deployment because we are far from undercapitalized at the moment as an industry. It isn't a flood of money coming in; it has been gradual. For example, mature companies like RenaissanceRe (Holdings Ltd.) and XL Group P.L.C. have been deploying sidecars for years. It is not revolution, but it is now reaching a critical mass. The challenge is deployment. There is a potential displacement effect, so we need to expand what we sell. For example, we could focus on catastrophic risk that currently is held by governments. For example, in the energy industry we could try to help in situations like BP P.L.C. after the Deepwater Horizon loss. I tend to think of this in a positive way. We need to match capital with risk. I never complain when capital comes into our industry because there have been times when there has not been enough.
Q: What does this mean for buyers of reinsurance?
A: Broader options, cheaper options, a better balance of the type of reinsurers and new products. It is great for clients.
Q: Is this convergence capital here to stay?
Yes, I do believe it is. I don't think that tried-and-tested pension funds are frivolous investors. They take a long time to make decisions. And they made the decision after the financial crisis that they needed noncorrelation in their business, to find noncorrelated assets for their portfolio.
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