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NEW YORK — Some hedge funds and other nontraditional investors in insurance don’t fully understand the risks they are taking and may have to rethink their strategies when underwriting losses hit, said William R. Berkley, founder and chairman of Greenwich, Connecticut-based W.R. Berkley Corp.
With interest rates at historical lows, many investors that are not familiar with insurance have seen the sector as an untapped source of income and have invested in underwriting operations, he said during the annual general meeting of the American Institute of Marine Underwriters in New York on Thursday.
“Many outside sources of capital — hedge funds, pension funds — have said, ‘Oh, this is a way we can achieve our required returns and use our money a second time.’ So if you’re a pension fund and have $20 billion, you put $2 billion into an insurance company and you get the investment return, and if you’re reasonably lucky you get an underwriting profit in addition. The fallacious part of that reasoning is that they think they get the underwriting profit automatically.”
When these institutions realize that is not the case, Mr. Berkley said, they’ll “reconsider how easy the business is,” and insurers will return to financial basics.
“Once again, always,” he said, “this business will come back to underwriting skill and expertise. It will come back to discipline and pricing. And while capital and expertise may have some opportunities separately, you need both. All of us have to figure out how to operate in a world that is so fast, but our results just don’t happen that quickly. It’s exciting.”
Looking at wider political and economic issues, Mr. Berkley said that “Europe is in the same struggle that we are that got Donald Trump elected: a population that is unhappy with the status quo; they’re unhappy.”
Mr. Berkley said he believes the economy is going to get better and that in the short run “you’re going to see some compromises done in Washington.”
W.R. Berkley Corp. reported a 1% increase in net income in a market in which it said insurance continues to be incrementally more competitive while reinsurance is gradually becoming less intensely competitive.