Energy and Chemical Reinsurance – Implications

Spreads of energy and chemical non-life Reinsurance types, as exemplified by the Energy Financial Instruments (EFIs), have come in the last few months, after years of rising prices. And, it could be that we are just in a lull in terms of increasing premiums. However, the long term trend must be increasing prices.

Oil prices are around $70 per barrel, and some media reports believe that the buyers and sellers of these derivative instruments still on the short term in the 17-25 month maturity period, are trying to lock in a price increase. If they are short-term instruments, some have already made money on the purchase of these products at the beginning of the year. Maybe they are just experiencing a slowdown in investor behavior; but maybe it is not sustainable. These U.S. based hedge funds must usually do much better than the regular insurers and reinsurers, for example, because they have a narrower risk appetite. However, the low interest rate environment may decrease their returns or even force them to invest in low-yielding low-risk instruments. Those who are long term investors in energy and chemical financial instruments may find their interest in these instruments to be limited, and so they are likely to buy the bonds of public companies on auction markets, so they are not so exposed to risk, especially in the case of a recession.

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