(September 6, 2013) – Pension funds now control “vast amounts of capital” in the reinsurance market, making them one of the top influencers for the sector, according to a report from AM Best.
The ratings agency’s special report, “The Capital Challenge: Reinsurance Capacity Overshadows Market”, found that while many reinsurers might believe hedge funds had the most say in their sector, the truth is that pension funds have slowly and stealthily built their presence over the past few years.
“These funds have been quietly involved in the reinsurance sector for some time,” the report said. “They have slowly taken the time to learn the industry, accumulate knowledge and gain some comfort with the sector’s cyclical characteristics and profitability.
“In addition, pension funds are typically long-term investors, which is more in line with reinsurance market fundamentals.”
Hedge funds meanwhile, are still typically deemed to be fast money; not that this should be seen as a criticism, according to the report.
It continued: “Many hedge funds, not necessarily all, dart in and out of markets as opportunities arise and are careful not to overstay their welcome. That strategy has its place in the markets, and the key differences need to be understood.
“Many market observers would expect that over time the vast majority of hedge fund participants will move in and out of the reinsurance sector, while a minority of hedge funds may make a longer term commitment.”
Pension funds’ movement into the sector has prompted a new wave of reinsurers trying their hand at being third-party capital managers. Since the most money will flow to the best managers, the report suggested that even traditional reinsurers that don’t have a long history of managing third-party capital are willing to try and capture those valuable assets.
“Reinsurers want to demonstrate success at managing third-party capital, because if the market continues to evolve in that direction, they need the ability to point to an established track record,” the report concluded.
“Until the staying power of recent third-party capital is tested by the wrath of a major loss, reinsurers will jockey for position to make sure they have a horse in that race.”
The full report can be found here.
Related Content: Insurers’ Investments Key to European Recovery, Claims Report and The Secret Is Out About Insurance-Linked Securities