Following up on July's "Hedge Funds Setting Up Reinsurers (Third Point, Greenlight, SAC)".
With Lax Regulation, a Risky Industry Flourishes Offshore
The hedge fund industry has been rushing headlong to open Bermuda-based reinsurers.
Reinsurance, already something of a murky business, may become even more complicated as a result. And while the hedge funds are likely to profit, the question is: Who’s watching to make sure this doesn’t lead to another financial calamity?
Reinsurance is the business of providing insurance to insurers. To hedge their risk, insurers will cede part of their claims by buying their own insurance from reinsurers. It’s a big business. Holborn, a reinsurance brokerage firm, estimated that $215 billion to $220 billion in reinsurance was written globally in 2011.
The reinsurance business plays an important role in paying claims from catastrophes for which regular front-line insurers don’t want to take the full risk. According to Holborn, the reinsurance industry spent an estimated $48 billion last year on claims related to the New Zealand earthquake, the Japanese tsunami and nuclear disaster and Hurricane Irene in the United States. If you are hit by a disaster, it’s probable that your insurance claim will be paid by the reinsurers.
Surprisingly, these big profits make it a good time to be a reinsurer. Less-capitalized companies have fallen by the wayside and premiums are likely to rise.
So why are hedge funds entering this business?
It’s the money....MORE