Hedge funds have long been big buyers of insurance-linked securities such as catastrophe bonds, which pay high yields until a disaster hits and make up more than 10 percent of the $570 billion global reinsurance market.
Some alternative fund managers are now taking the next step: setting up their own reinsurance companies to earn a share of premiums and invest the income in high-yield strategies while waiting for the next big hurricane or earthquake.Which are supposed to be the next big thing, according to
For the funds, natural disasters have the appeal of being random and usually unconnected to increasingly linked global financial markets, where returns have been low.
The new reinsurers say their ability to invest in higher-risk assets, bet on securities falling in price and leverage their bets with borrowed cash gives them an advantage over traditional reinsurers, which generally invest only in low-yielding, fixed-income assets.What's in a name?
Skeptics say reinsurers set up by hedge funds in lightly-regulated jurisdictions like Bermuda are not as well safeguarded as traditional big European firms like Hannover Re, Munich Re and Swiss Re....Speaking of unlikely, but potentially devastating events, Scott Sumner is trying to set up a demonstration market in NGDP futures. Which, when one things about it, has an insurable element in it.