October 20, 2014

Retail Investors – the third wave

A new type of investor – the retail investor – is rapidly becoming a major force in the capitalisation of the reinsurance industrySince 2005 there have been two broad classes of alternative investor in property reinsurance. Hedge funds/private equity funds looking for outsized returns and institutional investors attracted to an uncorrelated asset class.

Following hurricane Katrina in 2005, over $5 billion was raised to create new reinsurance companies and recapitalise old ones. At the same time, a rash of ‘alternative’ structures raised a similar amount through temporary sidecars. The investors behind this first wave of alternative capital were hedge funds and private equity funds that were looking to make outsized returns from the market dislocation.

Within a few years, these investors retreated from the market and were replaced by a second wave of investor – institutional investors. Specialist insurance linked funds had been making the argument that they were able to offer a way to access reinsurance returns with little market risk. A number of pension funds, endowments and mutual funds were convinced by this argument and these types of investor are probably the most significant contributor to the huge amount of capital that has flowed into the ILS fund industry in the last four years.

Since 2010, insurance linked funds have raised more than $30 billion which is more than the capital that was raised following hurricane Andrew, the World Trade Center attacks and Hurricane Katrina combined. The last two years have seen a significant part of that capital come from a third type of investor – retail investors. Funds targeted at retail investors now make up more than $6 billion of assets under management.

Retail investors are individuals who invest their own savings into funds – often using some kind of financial advisor. Regulators restrict the products that can be sold to retail investors for their own protection and, historically, there have been few ways for retail investors to invest in cat risk. The trigger for the inflow of retail investment has been the creation of cat funds that comply with some key pieces of regulation.

To read the full article, visit Insurance Linked


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