In a newly published report ratings agency Standard & Poor’s questions the viability of the hedge fund backed reinsurance strategy, asking whether combining the hedge fund and reinsurer strategy can create higher risk-adjusted returns.If that's not exciting enough for one's temperment Artemis also has on offer:
As the current reinsurance market is crowded, with pricing falling across the sector, S&P says that hedge fund reinsurers may find it hard to find the pockets of business where they can underwrite risk at adequate prices and create relevance for themselves in the market.
The question then is whether the combination of a reinsurance strategy with a hedge fund investment-side strategy, which is typically riskier than a traditional reinsurers investment strategy would be, can achieve a better return than the two strategies could when operated separately.
S&P says that hedge fund investment strategies typically take on more risk, consume vastly more capital and introduce more liquidity risk, than a traditional insurance or reinsurance investment play. However, readers will be aware that a more active investment strategy is becoming a focus even for some traditional reinsurance players, such as with Bermudian Platinum Re and even the large European reinsurer Swiss Re, both trying out more aggressive investments.
So having a more active investment strategy, to boost returns, is actually no longer purely the domain of the hedge fund reinsurer. However, where the strategy differs is in its approach to underwriting typically lower-volatility reinsurance business, while allocating almost all of their capital to a higher risk hedge fund investment strategy.
The search for alpha, better than benchmark risk adjusted returns, is the goal here. Leveraging the cash coming in from reinsurance premiums, on lower-volatility underwriting business, within their investment strategies gives these hedge fund backed reinsurers the chance to generate an outsized return for their investors....MORE
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