Insider In Full: Success for the diverse 'class of 2020' hinges on far more than the durability of the hardening market
Insurance entrepreneurs have continued to make progress with some of the class of 2020 start-ups, if you can call them that, in the past week...
But as they progress and we get closer to the 2021 renewals where their capacity could begin to be put to work, several questions remain hovering over these new platforms:
- Are they filling a real need?
- Which strategies are going to win out?
Who’s in the mix?
The 2020 start-ups will not be such a uniform group as in past “classes of” peer groups: they range from pure-play reinsurers to hybrid (re)insurers to fresh-slate start-ups to “scale-ups” that are building on a prior platform, and arguably could include transformational capital raises at incumbents such as Ark.
However overall, there are some conflicting messages around the market need for fresh capacity and fresh start-ups.
On the one hand, the market is agreed that January 2021 is going to be a challenging renewal, particularly in distressed areas like retro, casualty and financial lines, for reasons that go beyond questions of a simple supply-and-demand balance and into concerns around climate change risk, escalating loss inflation and low investment returns.
But at the same time, the very fact that many start-up entrepreneurs are honing their pitch to focus on scale-ups and acquisition targets suggests that they are conscious that market capacity remains strong in the aggregate and that they need to move as fast as possible while the rating opportunity lasts.
Sources suggested that the strength of the pricing opportunity was also a rising concern for PE investors as time went on during the third quarter fundraising, although industry figures remain extremely bullish.
Of course the need for new capital does not need to be conflated with a need for start-ups, which is why companies like Ark have seized the chance to raise funds, as Nephila co-founder Frank Majors pointed out in a recent Trading Risk Live presentation.
He said he did not think 2020 start-up activity represented a major explosion of new carriers “because there aren’t that many talented people on the sidelines and there isn’t really a need for new companies, there’s a need for capital”.
For investors then, the issue to weigh up is whether the potential cost of casualty reserving holes or a massive spike in Covid claims outweighs the risk of investing in a new start-up that will take time to gain a foothold in the market.
This question is tied up in the ultimate assessment of how attractive the market is right now and how long it will last.
It’s striking that Conduit Re’s marketing presentation harked back to 2001 and 2005 start-ups to talk about the premium and yields those businesses made in their first five years of operation.
This is partly because we haven’t had pure-play de novo traditional reinsurers launch since then – which is why this year’s start-up activity is drawing so much attention and interest – but it also sets an ambitious bar for the carrier to target.
The world has changed a lot since then: carriers and ratings agencies prioritise scale and diversification more than in the past; structural cat returns are lower and having a third-party capital platform matters.
In some market segments, rates might be truly in hard market territory, like the retro segment, but overall, many CEOs on recent earnings calls have been relatively balanced on the outlook and emphasised that rates are rising but not necessarily hard, or that returns are the best in many years – but not rewinding the clock as far as the stellar post-01/post-Katrina era.
The current market exists in a very different backdrop than 2005, and it will be hard for these start-ups to achieve what the prior classes did. There is more plentiful capital, there is no runaway hard market and competing against larger incumbents is hard.
If a different business model is required for this year’s start-ups to achieve traction in the longer-term, then arguably it’s one that we haven’t yet seen – more innovation is arguably going on in InsurTech or other segments.
Everest Re CEO Juan Andrade made a similar point earlier this year when he told our (Re)Connect conference that the start-ups must build a business case that rests on more than taking advantage of a firm market.
“I think at this point unless you have $7bn or more of capital, I don’t think it will make a big difference in my mind to some of the key customers we have out there,” he said.
Already a wider range of start-ups are closer to launch than we might have been expecting mid-year, so the backers of these vehicles are clearly succeeding to some extent.
But the real evidence for their victory will only be seen some years down the line.
Insurance Insider delivers global wholesale, specialty, and (re)insurance intelligence that enables you to act first. Redeem your complimentary 14-day trial for more premium content from Insurance Insider.