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The insurance industry needs to attract $100 million in investments from private equity companies and other large investors to plug in the cover gap for natural disasters and cyberattacks, says one of the world’s largest brokers.
“We’ve failed if we didn’t bring in $1 trillion in alternative capital over the next decade,” Aon CEO Greg Case told the Financial Times.
According to Aon, insurance covers less than a third of the costs of natural disasters since 2000. This is part of the “protection gap” in actual costs due to increased losses and asset values for insured parties, with climate change strengthening the storm and traditional insurers reaching the limits of risk.
As losses from events such as large hurricanes and cyberattacks are generally irrelevant to the stock market, insurance has begun to attract investment from investors such as sovereign wealth funds and pension funds.
However, investment in the sector is projected to double over the next five years.
“As long as you have access to other capital pools in addition to insurance capital.
Aon CEO Greg Case said the rise in volatility means the industry needs to double its efforts to help alternative investors assess and understand risk ©aon
Hedge funds, sovereign wealth funds, and rich individuals have accumulated into insurance risk through catastrophe bonds (catastrophes that provide double-digit returns in exchange for contracts paid in the event of a disaster).
According to Aon, these and similar vehicles have raised over $115 billion in alternative capital.
However, the case shows that while there is room for significant further growth as demand from businesses seeking coverage for increased losses from natural catastrophes and cyber incidents increases, traditional insurers have cut it to help individual clients spread risk exposure.
Private capital companies have begun supplying capital through other structures in addition to catastrophes and expert investment funds.
In December, US insurance company AIG announced a new $775 million entity designed to use Blackstone Management funds to cover it against some of the more unlikely risks in its portfolio.
The case said the rise in volatility would require double efforts to help alternative investors assess and understand risk, even as the industry generates greater demand for insurance.
“If we don’t understand that, you won’t put your capital behind it,” he said. Insurance investment performance has been varied in recent years, he added.
“The best things worked very well,” he said, “Capital asks, is volatility worth it?”
