Reinsurers could take over the US flood insurance programme from the US government, according to Validus Holdings CEO Ed Noonan.

Speaking on a panel at the PwC/S&P Bermuda (Re) insurance Conference yesterday, Mr Noonan said flood coverage was one area where the reinsurance industry could find growth.

Mr Noonan said the government programme had “served its purpose”, but these days the industry was better able to measure the flooding risks, through greater availability of data and better technology to analyse it, as well as an abundant supply of capital.

“There’s no reason why the flood programme should still be run by the government,” Mr Noonan told delegates at the Fairmont Hamilton Princess hotel.

A greater portion of certain types of terrorism coverage could also be borne by the private sector, Mr Noonan argued.

He conceded that nuclear, biological, chemical and radiological terrorism risks were extremely difficult to quantify and effectively “uninsurable” by the industry.

However, he added: “We understand non-nuclear terrorism and so we in the private sector could take over conventional terrorism risk. I would like to see government come out of this type of terrorism reinsurance and hand it over to the industry.”

Mr Noonan and fellow panellists Don Kramer, CEO of ILS Capital Management, and John Berger, chairman and CEO of Third Point Re, agreed that global growth was slow and that growth in reinsurance demand was correspondingly slow.

The panellists also said negligible investment returns from reinsurers’ investment portfolios as a result of low interest rates meant companies were relying more heavily on underwriting for profitability than had normally been the case. At the same time, third-party capital, in the form of insurance-linked securities such as catastrophe bonds. However, returns were reasonable, without matching the mid-teen percentage returns on equity that many were achieving in the past.

Mr Berger noted that Validus and Third Point had adopted opposite strategies — Validus becoming a leading underwriter of short-tail risks while investing very conservatively, while Third Point Re invested relatively aggressively through its asset manager Dan Loeb’s hedge fund Third Point and underwrote conservatively.

“From a volatility point of view, we’re very similar — natural catastrophe risk versus economic catastrophe risk,” Mr Berger said. The two companies were simply taking their risks on opposite sides of the balance sheet.

Mr Noonan said a large fixed-income portfolio was very sensitive to changes in interest rates. Should rates start to rise from their rock-bottom levels, then the value of bonds held will fall.

“The industry is spending more time thinking about asset management and thinking about how we can remain as conservative as we are, but not be so exposed to changes in interest rates.”

Mr Kramer, whose companies manages ILS investments, said he had seen returns on catastrophe bonds slide as the proliferation of ILS continued. “We’ve seen some cat bonds yielding three or four percent, when it used to be 20 percent,” Mr Kramer said.

“Many of the investors in this space are pension funds and they don’t want to see their investments go up 12 percent one year and come down 12 percent the next.

Investors are having to use a combination of portfolio analytics and risk analytics to keep the volatility down.”

Mr Noonan noted that many of the cat bonds which had been triggered were in litigation. It was “very early days” for ILS and there was “room for surprises”, he added.

All in all, the panellists expected steady progress in the industry.

“The industry has never been in better shape than it is now,” Mr Berger said. He cited the wealth of intellectual capital in the industry, healthy reserves and decent returns. “Over time, our industry has been great at destroying capital — but I’m confident it won’t happen again,” he added.