(Updates with comment from Kessler, adds details)
By Nathalie Boschat
Of DOW JONES NEWSWIRES
AIX-EN-PROVENCE, France -(Dow Jones)- The current downturn is boosting demand for reinsurance as insurers increasingly seek alternative sources of capital in the face of tough conditions on financial markets, the chief executive of French reinsurance company Scor (SCR.FR) said Saturday.
"We provide a substitute for other forms of financing. When financial markets are disrupted, insurers have difficulties tapping financial markets...Reinsurance provides last resort support to these companies," Denis Kessler told Dow Jones Newswires in an interview on the sidelines of a conference here.
"Unlike financial markets, which can be disrupted or can even close altogether, reinsurers are always open for business," he added.
Another part of the activity of reinsurers, which is the coverage of major risks such as natural catastrophes, is not linked to the economic cycle, Kessler also noted.
"That's why all in all demand for reinsurance tends to be strong" in the current context, he said.
Growing demand for reinsurance is fueling a rise in prices, all the more so as supply of reinsurance tends to shrink, unlike during previous cycles, Kessler said.
"We see an uptick in prices during each renewal campaign...We have entered a phase during which prices as well as terms and conditions are becoming more favorable to reinsurers," he said, adding that he sees this phase lasting "several years."
An increasing imbalance between supply and demand is underpinning the uptick in prices, as the financial meltdown is forcing some players to concentrate on their core business and is causing capital to flow out of the reinsurance industry, Kessler explained.
"During previous cycles, when prices were going up like after the Katrina hurricane, new capital was entering the industry to take advantage of higher rates...But these days, hedge funds and even banks are reluctant to invest in reinsurance as they have other problems to deal with...Overall, supply tends to diminish," he said.
Because of current favorable industry trends, Kessler sees limited scope for consolidation in the immediate future, stressing that the number of players is already rather small. "In times of revenue growth companies tend to concentrate on organic growth," he said.
Reinsurers which have stuck to their core business have proved more resilient during the global slowdown, Kessler said, in contrast to those which have made a foray in banking or have suffered from their exposure to complex derivatives products, like troubled U.S. insurance giant American International Group (AIG).
The financial crisis is likely to put pressure on the business model of financial conglomerates, he added.
"Scor has exactly followed its road map," Kessler said, stressing the company had not engaged in any banking or off-balance sheet activity, and had heavily shifted its exposure to cash from the onset of the financial crisis.
He said Scor had enough capital to underwrite its current business.
"We are a capital-driven company. We are only taking on risks that are commensurate with the size of our capital."
-By Nathalie Boschat, Dow Jones Newswires; +33 6 1139 0445; nathalie.boschat@dowjones.com.
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Publié le 04 Juillet 2009 Copyright © 2009 Dowjones