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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.
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, told Reuters.
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.
Hannover Re said in June it will see a net boost to business from Solvency II. Around half its non-life business will be affected by the new rules, which will ultimately have an impact on the pricing of premiums.
Bryan Joseph, global actuarial insurance leader at consultancy PricewaterhouseCoopers, said pricing may have to change if insurance companies want to maintain their return on capital employed.
"If shareholders are not prepared to accept a lower return, insurers may need to charge a higher price," he said.
Solvency II is already affecting what assets UK pension companies are holding to back their business.
"Insurers have to invest their assets in something, but Solvency II is driving companies away from riskier assets to safer (ones) — away from corporate bonds to government gilts and shorter-duration bonds," said David Prowse, senior director at Fitch Ratings.
This gives lower expected returns and thus lower annuity rates for companies, he said.
Britain's Aviva saw annuity sales for the first half of this year rocket up 92 percent — an indicator of changing market shares as insurers move towards gilts and reprice accordingly, said Prowse.
European insurers start testing the new Solvency II rules this month in a massive exercise known as Quantitative Impact Study No. 5, or QIS 5.
