Adverse economic conditions and reinsurance market turmoil has challenged industry participants throughout 2015 and into 2016, with hedge fund reinsurers being no exception, but it’s still too early to call this approach a failure, according to A.M. Best.
The global reinsurance industry continues to evolve, leading market participants both old and new to adopt varied business models in order to navigate the challenging environment, underlined by an abundance of capital, low investment returns, and ultimately lower rates.
The growth of the convergence space has arguably been one of the key drivers of change in the sector in more recent times, as companies look to work with and against the growing base of insurance-linked securities (ILS) capital and solutions to improve their market relevance.
One manifestation of the wealth of convergence capital, says A.M. Best, is the emergence of the hedge fund reinsurer, which seeks to utilise both the underwriting and investment side of the balance sheet, with the latter being the main driver of performance.
With interest rates remaining dangerously low, investment returns for hedge fund style reinsurance companies have suffered, which, being the main driver of company performance has hindered results in recent months.
At the same time, the softening reinsurance market cycle across the majority of business lines and geographies has dampened underwriting returns for all in the space, contributing to further struggles for both the hedge fund and more traditional players.
“While investment and overall performance has been disappointing, it is too early to jump to the conclusion that the Hedge Fund Re model does not work. The level of investment volatility experienced is not unexpected and is contemplated in our various stress tests....MORE