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Alternative capital takes aim at primary insurance sector


DALLAS —  Primary property/casualty insurance will likely be the next sector to see an influx of alternative capital entering the market, according to Steven Levy, president of reinsurance at Princeton, New Jersey-based Munich Reinsurance America Inc.

Pension funds and other nontraditional capital providers have already disrupted the reinsurance sector through insurance-linked securities and other investments, so expansion into the primary market would be a natural progression, he said at the annual meeting of the Property Casualty Insurers Association of America in Dallas on Monday.

Alternative capital investments in the reinsurance sector have slowed over the past two years as traditional reinsurance rates have fallen, Mr. Levy said.

 However, “something I think we are going to see more of is alternative capital competing more directly with primary insurers … the primary property space is a much bigger opportunity space for alternative capital,” Mr. Levy said.

One source of competition to the traditional insurance and reinsurance sector that will likely not grow is hedge fund reinsurance, he said. Over the past few years, several hedge funds have set up reinsurance arms that seek to use less conservative investment strategies than are usually used in the reinsurance sector.

Most hedge funds over the past couple of years have generated subpar investment results, so “that’s hardly justification for a reinsurance business model where you have above-average combined ratios,” Mr. Levy said.

“I do think it’s a little too early to ring the death knell of hedge fund reinsurers, but it wouldn’t shock me if we are ringing that bell three to five years from now,” he said.