Reinsurance startups face uphill climb as renewals restore supply-demand balance

The outcome of the Jan. 1 reinsurance renewals will make life tougher for new entities hoping to enter the market and capitalize on good trading conditions.

The supply of reinsurance cover more closely matched buyer demand at the most recent renewal date, after reinsurers' efforts to restore profitability by cutting exposure to riskier areas created an imbalance at the prior year's renewal period. This leaves fewer supply gaps for startups to fill, making it trickier for them to gain a foothold.

"In a market that is well balanced in terms of supply and demand, it's really hard to deliver new capacity without having to make really big price compromises," Russell Merrett, chief underwriting officer at Lloyd's insurer Inigo Ltd., said in an interview. New entries that do not bring anything other than more capacity would find it hard to build a book of business, he added.

More capacity

After the large price increases and coverage reductions reinsurers secured at renewals in 2023, and existing reinsurers' resulting improved profitability, work began on a small clutch of reinsurance startups to take advantage of the improved trading conditions. However, none launched in time for the latest renewals and none so far has raised capital.

Prices continued to rise this go around, but the rate of increase was far lower than at the start of 2023, particularly for property-catastrophe reinsurance, where reinsurers did the bulk of their remedial work. Global property-catastrophe prices rose 3% on average at Jan. 1, according to a report from brokerage group Howden Group Holdings Ltd.., following a 37% increase the previous year.

Reinsurers' improved financial performance last year, driven in part by their efforts to cut exposure to smaller, more frequent natural catastrophes, gave them more confidence to extend capacity to buyers at the start of 2024.

"They didn't take huge catastrophe losses last year, and as a result, a number of them were looking to grow their cat books at the prevailing terms going into the renewals," Mike Van Slooten, head of business intelligence at Aon PLC's reinsurance solutions division, said in an interview.

This year's renewals have given buyers more confidence that there is no capacity shortage, Merrett said.

Capacity supply was particularly strong in the upper layers of property-catastrophe reinsurance programs, which require bigger losses to trigger payout.

"If you have narrow coverage and high attachment, you have a heady mix where there did seem to be quite a lot of additional capacity available and some additional demand for that capacity," Merrett said.

Global reinsurer capital rose to $635 billion in the first nine months of 2023 from $590 billion for full year 2022, according to Aon's renewal report.

The industry's capital position will not necessarily prevent people from trying to form startups, but there does not seem to be a need for new entries, according to David Govrin, chief underwriting officer of Bermuda-based insurer and reinsurer SiriusPoint Ltd.

"I don't personally see an influx of a lot of capital into new operating companies," Govrin said in an interview.

Another challenge facing startups and others looking to raise capital is that, despite reinsurers' strong performance in the first nine months of 2023, investors need further evidence that the reinsurance industry has turned the corner.

"Until the industry starts producing strong results on a consistent basis, many [investors] will sit on the sidelines," Van Slooten said, adding that higher interest rates provide investors with other avenues for their capital.

Door still open

Although the chatter about new companies has quietened, Mereo Advisors, the most prominent of the would-be new entrants, is still gearing up for launch. Mereo has hired David Croom-Johnson, former CEO of Lloyd's insurer AEGIS London, as its CEO and is targeting a launch in the first half of 2024, Insurance Insider reported.

Reinsurers' full-year 2023 earnings, due out in February and March, and the outcome of the Jan. 1 renewals, will give wary investors more information on the industry's progress. Some may decide that now is the time to enter the sector, "but we'll have to wait and see," said Van Slooten.

"This is not an easy environment in which to raise money to support reinsurance underwriting, but we're hopeful that maybe one or two of these ventures will get off the ground perhaps ahead of the midyear renewals," he added.

The geopolitical situation, with signs of the Israel-Hamas war spilling into other parts of the Middle East and elections in more than 60 countries around the world, mean that market conditions could change rapidly.

"If I was a startup, I'd keep my plans very close to me because it could all change again in a heartbeat," Merrett said.