Wednesday’s headlines: Hedge fund industry rushes to open Bermuda-based re-insurers
What did regulators expect? Dealbook commentator Steven M. Davidoff writes that hedge funds -- desperate for hot profits – are running to open re-insurers in Bermuda, home of lax oversight where a re-insurer can use premiums the hedge fund collects to invest with the hedge fund itself – funds that can’t be withdrawn by fickle investors.An estimated $220 billion of reinsurance was written globally in 2011 The site summarizes:
Reinsurance, already something of a murky business, may become even more complicated as a result. And while the hedge funds are likely to profit, the question is: Who’s watching to make sure this doesn’t lead to another financial calamity?
David Einhorn’s Greenlight Capital pioneered this trend in 2004 by creating Greenlight Re in the Cayman Islands. In the last six months Daniel Loeb of Third Point has announced the creation of the $500 million Bermuda re-insurer TP Re; Steven Cohen’s SAC Capital Advisers created a $500 million Bermuda re-insurer called SAC Re. The problem, the blog reports, “is not that so much of the business is offshore, but that the growing role of hedge funds may push the main re-insurers to be more aggressive with their own investing. The result would be to push the reinsurance market into becoming a giant hedge fund industry.”
Davidoff argues: The reinsurance market is starting to look like many of the markets before the financial crisis — lightly regulated and interconnected in ways that policy makers can’t see, with banks potentially left with the wreckage. The industry may be right that reinsurance is different and has its own checks and balances, but we’ve also heard that before. It behooves United States regulators to make sure.