The demand for alternative reinsurance instruments is set to continue, according to Fitch Ratings’ new report: Alternative Reinsurance 2013 Market Update.
The trend is due to the comparatively high potential returns of catastrophe risk through cat bonds and sidecar investments and the lack of correlation between catastrophe losses and returns on other major asset classes.
Brian Schneider, co-head of reinsurance at Fitch Ratings, said: “The convergence of the reinsurance and capital markets is likely here to stay and should continue to grow in the near term.”
“Powerful economic forces have driven acceptance and use of capital market alternatives to traditional reinsurance.”
According to Fitch's report, one area of uncertainty is how investors would react to a large unexpected catastrophe loss, or higher risk spreads, either of which could cause investors to pull out of these instruments.
Fitch considers this risk to be higher for hedge fund capital, as pension funds tend to have a long-term investment outlook and more diversified risk exposure.
To read the report in its entirety visit the Fitch Ratings website.
