25 October 2015 News

A tough road ahead for hedge fund reinsurers

Some hedge fund reinsurers are “a solution in the market looking for a problem that doesn’t exist,” Kenneth Brandt, president, North America, TransRe, told PCI Today.

While a case can be made for hedge funds operating in the property/catastrophe space; those attempting to diversify into the casualty sector are making a mistake, believes Brandt.

Brandt conceded that in terms of the property-cat market the model makes “perfect sense”.

“In terms of this risk, there is way too much peak zone national cat exposure resting on too few balance sheets. To spread that widely through the capital markets was inevitable and evolutionary and it makes perfect sense,” he said.

But it was an “altogether different proposition” where hedge fund vehicles were seeking to break through on the casualty side.

“It’s much more difficult for them, in my opinion,” he said. “I am not talking about the facilities that are set up more as a captive re/insurer—that’s different and they have a business model there that is clear, but in terms of those hedge fund re/insurers who are going out and trying to compete in the market for third party casualty reinsurance, that’s a very difficult proposition and I don’t worry about that at all.

“If I am a buyer, what is my motivation to place my cover with a hedge fund reinsurer rather than a TransRe or Swiss Re? I think they have a tough road to go down.”

For Brandt, the opposition is pretty much what it has always been.

“We are competing against other traditional reinsurers that have an external customer value proposition, as opposed to hedge fund reinsurers whose value proposition is completely internal to their investors.”

He slammed those organisations that adopt a hybrid insurance and reinsurance combination.

“We are not going to reinsure you on a Monday and then take that business away from you on a Tuesday as a competitor,” said Brandt.

“It’s kind of quaint now that everyone is merging, but we think that being a global focused reinsurer with a value proposition directly to our customers is not only important to them—it’s important to our own success.

“We are a global reinsurer. Yes we are in a tough part of the cycle and we work with our customers closely to work through it.”

In a market that is soft in terms of rates reinsurance across most product lines, that’s not easy to accomplish.

“I’m not sure how much lower it can go,” he said. “There has been some deceleration in some products and we are hopeful that overall—or certainly in some major product lines—we can find the floor in 2016.”

Cyber is one area that Brandt has marked down for strong future profits, describing it as “a perfect growth area for reinsurers” with TransRe developing its own in-house team and appointing a global cyber leader back in March.

Brandt saw the potential in the cyber sector if expertise in the field could be demonstrated and leveraged.

“The exposures are dynamic and scary and are changing all the time and we have seen a lot more interested submissions covering individual risks and portfolios of business on cyber. When there’s not a lot of data to go on firms tend to see reinsurance as a potential solution and that’s certainly good news for us. There is a lot of business in that area,” he said.

Client interest is from both a treaty and a facultative perspective and from “across the entire industry globally”. Brandt said that the company’s global reach and the data provided by those companies allows it to price the risk accordingly.

“In an area that is rather opaque we have a fairly decent view of what’s going on,” he added.

Climate change, however, is not a sector in which there is any specific product offering.

“We don’t see any particular climate change products and I am unclear whether people are buying differently or not because of the existence of climate change,” said Brandt.

“Whether you believe in it or not it’s good for the industry in terms of buying protection.”

TransRe is “actively looking” at the Flood Re public-private reinsurance proposal to cover flooding events in the UK, he said.

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