Alternative capital has transformed the reinsurance market, but Australian insurers remain loyal to traditional reinsurance because they know it will pay claims, IAG CFO Nick Hawkins says.

He told the Actuaries Institute’s Catastrophe Risk Seminar last week that reinsurer counterparties’ reliability is vital to buyers.

“Will they be around for a number of years? Will they be around to pay us?”

IAG buys $5-$6 billion of reinsurance annually from 40-50 counterparties. Mr Hawkins says his group and Suncorp attract the global reinsurance market.

New money from hedge and pension funds has poured into alternative securities such as catastrophe bonds in recent years, attracted by comparatively high returns.

But seminar delegates questioned whether such investors would remain in the market if a bond had to pay out a total loss, or if returns elsewhere improve.

They heard reinsurers who reduced exposure to Australia and New Zealand after the 2011 floods and Canterbury earthquakes are now returning.

Willis Re Australia MD Ty Birkett says reinsurers recorded a collective combined operating ratio of 110% in 2011, moving to just above 90% in 2012 and below 90% last year, so although they might not like the current soft pricing “they are still making money”.

Traditional reinsurers are also using alternative capital.

Aon Benfield Head of Broking John Carroll says insurer boards are “massively focused” on whether reinsurance arrangements meet regulatory requirements.

Australian Prudential Regulation Authority Deputy Chairman Ian Laughlin says there has been “good progress” in boards’ attitude to risk.

The seminar also discussed the reliability of catastrophe modelling and its relevance to Australian risk. Mr Laughlin says boards and managements have to understand the weaknesses and assumptions inherent in models.

“It is essential the board pays close attention to catastrophe risks. It needs to satisfy itself that risks are well understood, quantified as much as possible, mitigated appropriately and the residual risk is within appetite,” he said.

“Insurers need to challenge themselves about their catastrophe risk and reinsurance arrangements.”