AM Best is the latest company to note that the reinsurance market has yet to produce any new companies in the segment, defying past trends where companies were formed to meet the demand, supported by investors.
“Despite returns reaching a three-decade high for reinsurers, a new class of companies has yet to materialize in the segment, defying past trends,” they state. “The reinsurance segment is generating risk-adjusted returns not experienced since 1993. However, a new class of reinsurers has yet to form, despite existing hard market conditions that were present when prior new classes materialized.”
A series of property catastrophe events
The report, The 2023 Reinsurer Class – the Class That Never Was, adds that this hard reinsurance market is different from many of the prior hard markets in that it was not caused by a single, large loss, “but by the accumulation of a series of property catastrophe events, which led to significant underwriting losses and resulted in earnings events for almost all reinsurers.”
A lack of venture capital interest, more competition and higher barriers to entry, and alternative entry points for investors – in particular the availability of insurance-linked securities (ILS) – along with rising risk-free rates are all cited as reasons for the dearth of new entrants in the space.
“Perhaps the most significant deterrent to investor capital for start-up reinsurers is the precipitous rise in risk-free rates. Since the start of 2022, 10-year treasury rates have nearly tripled, with credit spreads also widening. This raises the minimum rate of return that a new company would need to justify investor risk.”
Related:
Hard reinsurance market fails to inspire new entrants
