General Insurance Article - S&P looks at the risk factors around hedge fund reinsurers

 Does combining a reinsurer strategy with a hedge fund strategy create higher risk-adjusted returns than the two approaches could achieve separately? This question is examined in a report released by Standard & Poor's Ratings Services entitled Hedge Fund Reinsurers: Are The Potential Rewards Worth The Added Risk?

 In the current crowded reinsurance market where prices are falling across the sector, it will be hard for hedge fund reinsurers (HFRs) to remain opportunistic in finding pockets or subsectors where they can underwrite adequately priced business and become relevant in the marketplace. HFRs' investment strategies are risker, consume vastly more capital, and introduce more liquidity risk than those of traditional reinsurers.

 Merging divergent risk cultures and adopting control systems similar to those of traditional reinsurers may help mitigate some of these risks, but may be challenging. "In our view, traditional reinsurers' and HFRs' risk-taking frameworks are far apart, and these differences need to be reconciled, possibly more toward the traditional reinsurers' approach, so that HFRs can achieve higher financial strength ratings," said Standard & Poor's credit analyst Taoufik Gharib.