Solvency II, Basel III to encourage capital into reinsurance and insurance-linked sectors

Two upcoming changes to regulatory environments in insurance and banking within Europe are set to increase scrutiny of the sector from those with capital to deploy and could create unmissable opportunities to profit, which may never be seen again, was a conclusion of a roundtable discussion moderated by Opalesque.

The roundtable is a regular event held by Opalesque, a publisher of alternative investment news and insight, and see’s them invite leading figures from the alternative asset management space to discuss issues that affect the sector and opportunities that present themselves.

One of those opportunities receiving attention from alternative investment managers is reinsurance and the insurance-linked investment strategies space. Evidence of the interest is being seen in the form of hedge fund managers who have moved into the reinsurance space, such as Steven Cohen with SAC Re, Daniel Loeb with Third Point Re and Paulson with his interest in PaC Re.

Opalesque say that it is not just hedge fund managers who are moving into the re/insurance business, ex-bank prop traders are also showing interest in the sector and there is a continuing flow of pension fund capital into reinsurance, catastrophe bonds and insurance-linked securities due to their low correlation with the wider markets and high yields.

Solvency II and Basel III are words which are getting Joe Taussig, founder of Taussig Capital AG, excited according to Opalesque. Taussig participated in the roundtable and his firm partners with investment funds to help them to create reinsurance companies or re/insurance-linked investment opportunities. Taussig said that Solvency II and Basel III will force banks to deleverage on the asset side and insurance companies to deleverage on the liability side. The resulting environment once these rules are in place will create dislocations in banking and insurance and therefore provide unique opportunities.

Taussig is extremely bullish and see’s significant and growing interest from investment managers in the reinsurance sector. This tallies nicely with the sentiment of many people we speak with who expect continuing flows of capital from alternative investment sources into the reinsurance and ILS spaces. How sticky that capital is will be the unknown, however at the moment there is plenty of reasons to believe that at least some of that capital will stick around and wait to see how the implementation of these new rules pans out and what opportunities they present.