Billions of dollars from pension
funds and other nontraditional players have been moving into the reinsurance
business in recent years, according to a recent report released
by the Treasury Department.
The report found that pension funds had
put about $59 billion into the $570 billion global reinsurance market as of
June 30. That was more than three times their stake in 2007.
The report also said that more than half
the capital standing behind reinsurance innovations now comes from “pension
funds, endowments and sovereign wealth funds, generally through specialized
insurance-linked investment funds.”
By contrast, hedge funds and private
equity firms now provide about one-fourth of the money for such investments.
The report said that alternative
reinsurance arrangements were increasingly being pitched to investors as
“mainstream products” and said that “exposure to such risks could be
problematic for unsophisticated investors.”
The report was issued by the Federal
Insurance Office, an arm of the Treasury established in the wake of the 2008
financial crisis.
Normally the states regulate insurance,
but the Federal Insurance Office has been looking at parts of the industry that
extend beyond state regulators’ reach. Reinsurance frequently transfers risks
offshore, for example, to jurisdictions where the states’ capital and other
requirements do not apply.
Increasingly, some states have been
creating alternative
regulatory frameworks to
attract some of the offshore reinsurance business back to the United States.
That can bring investment and jobs to those states, but it has also raised
concerns that a poorly understood and risky “shadow insurance” sector is taking
shape.
“Regulatory concerns about this
widespread practice continue to receive attention within the national and
international insurance supervisory community,” the report said.
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