(updated with correction)
A small increase in allocations from institutional investors — mostly through hedge funds — is playing havoc with the property-catastrophe reinsurance markets.
“Fifteen years ago, the catastrophic reinsurance market was close to 100% dominated by traditional reinsurance companies, like Berkshire Hathaway Inc.,” said John Lummis, CEO of AQR Re Ltd., Hamilton, Bermuda. AQR Re is the reinsurance affiliate of alternative investment manager AQR Capital Management LLC, Greenwich, Conn.
“The reinsurance business definitely is evolving under the influence of significant assets coming from the institutional investment market. The changes are on the margins now,” Mr. Lummis said, but likely will become more significant as institutional dollars suck up the industry's limited capacity.
Assets invested in reinsurance by non-industry investors rose 800% to $45 billion as of June 30 — from just $5 billion in 2005, according to an estimate in an Aug. 7 report by Goldman Sachs Group Inc.'s global investment research unit.
Much of the growth has been from pension funds, endowments, foundations and sovereign wealth funds via hedge funds, industry observers say.
If pension funds — with an estimated $20 trillion of aggregate assets — allocated just 0.5% of their assets to P-CAT investments, the resulting $100 billion would be more than double the existing amount of alternative capital in the reinsurance industry, the Goldman Sachs report noted.
“The total amount of pension fund assets … dwarfs the size of the whole reinsurance industry. Even a small fraction of those trillions would completely swamp the reinsurance industry,” said Michael Luft, managing director and consultant, insurance-linked securities, at investment consultant Rocaton Investment Advisors LLC, Norwalk, Conn.
Reinsurers already have seen significant decreases in the premium prices they can charge insurers, Mr. Luft said, because there is so much outside capital coming into the industry.