Catastrophic events, such as major hurricanes and the Sept. 11 terrorist attacks, traditionally have led to hard markets that in turn drove the formation of startup reinsurers to fill capacity needs. Reinsurers launched in “the class of 1992,” “the class of 2001,” and “the class of 2005” went on to become market leaders.

But something different has happened in the current hard market. This time, a “class of 2023” never formed — and there are few prospects for 2024 and 2025.

In past years, large-scale catastrophic losses precipitated the shift to a hard market cycle by depleting existing capital and forcing up reinsurance prices. Under these old rules, a hard market would whet investor appetite “to allocate funds to the reinsurance market to enjoy the benefits of the expected hardening of underwriting conditions and resulting outsized returns,” explained AM Best in a new report.

Reinsurers and their capital providers created “the class of 1992,” “the class of 2001,” and “the class of 2005” in response to hard markets created by Hurricane Andrew in 1992 (when companies such as IPC Re, PartnerRe and RenaissanceRe were formed); the Sept. 11 terrorist attacks in 2001 (when Allied World, Arch Capital, Aspen Insurance Holdings, Montpelier and Platinum Underwriters were formed) and Hurricanes Katrina, Rita and Wilma in 2005 (when Ariel Re, Flagstone, Harbor Point, Lancashire and Validus were formed).

Under the traditional rules of a hard reinsurance market, many of these new companies would merge or be acquired when the soft market phase of the cycle returned along with supply/demand equilibrium. However, the current hard market cycle “is noticeably devoid of new reinsurer formations,” according to AM Best in its report, titled “The 2023 Reinsurer Class – The Class That Never Was.”

What’s the difference between today’s hard market and previous market cycles? AM Best said it’s all about investor appetite, or lack thereof.

The current inability to raise startup funds is not due to a lack of effort or a dearth of talented executives, “as some high-profile management teams publicly announced their intentions to form new reinsurers, while many more were rumored to be seeking funding. Ultimately, none of the potential entrants have made it past the fundraising stage,” said AM Best.

Indeed, at last year’s Rendez-Vous de Septembre (RVS), the market’s annual reinsurance meeting in Monte Carlo, there were reports that former Hannover Re and AXIS Re executives were aiming to raise $1 billion to launch a Swiss-based reinsurer. However, that company is still in the planning stages.

A broker from Gallagher Re interviewed by Insurance Journal at the RVS said the market was hoping for another Convex Group, which launched in 2019. “Convex has been a real success story, but it’s not that easy to do. You need to find money and investors that trust your business plan. You need to have a very, very good team and you need to have someone that’s prepared to invest in you with the full knowledge that you’re not going to make money short term. It’s a long-term game. And bringing all of that together doesn’t seem to be such an easy thing.”

Barriers to Entry — and Exit

AM Best attributes a good portion of investor disinterest in property/casualty reinsurance startups to a healthy competitive landscape — both internationally and domestically — as well as high barriers to entry and exit.

Despite investment losses in 2022 precipitated by rapidly rising interest rates, AM Best noted, “there were no material adverse credit outcomes that would have driven the opportunity for new reinsurers to enter the market,”

At the same time, some larger reinsurers were able to raise significant amounts of new equity capital to take advantage of hard market conditions. AM Best said this created a dilemma for investors who want certainty “that a newly funded reinsurer will have a place in this market once it turns; otherwise it will be difficult to liquidate its holdings and realize profits or avoid capital losses.”

In addition, the scale and capitalization levels of established reinsurers make it difficult for startup reinsurers to compete, AM Best said, noting that reinsurers in the past could viably enter the market with US$1 billion of new, equity capital. However, this level of capital is now “insufficient to enter the market in as meaningful a way as in the past.”

A decade ago, $1 billion in reinsurance premium volume would place a reinsurer in the 37^th position on AM Best’s ranking of top reinsurers in the industry. However, that same $1 billion of premium today would place the company at number 47, the report said. “At the lower position in the market, it’s difficult to visualize what value a new company would meaningfully add to the market dynamic and how it would be perceived when it comes time for private equity investors to exit their positions.”

Many Entry Points for Investors

AM Best indicated that investors have many additional avenues available to deploy their capital – or alternative entry points, which didn’t exist in the past.

For example, the increased availability of insurance-linked securities (ILS) provides investors with better opportunities than prior hard market cycles, said the report, noting that the expansion of ILS capital began in the early 2010s, with assets now valued at nearly $100 billion.

The existence of a robust ILS market has “diminished the franchise value of property catastrophe business to investors,” AM Best continued. “Investors today appear much keener to allocate funds to shorter-term ILS instruments to capitalize on the hardened underwriting conditions, rather than a rated balance sheet.”

Investors currently can access exposures to the hard property catastrophe reinsurance market “through either established ILS products or large, well-diversified balance sheets of rated companies with proven risk management platforms,” the report explained.

“These factors have diminished the attractiveness of startup reinsurance investment opportunities, where capital can be committed for at least a five-year time horizon in an unproven platform, despite high levels of startup capitalization and experienced management teams.”

The question that has yet to be determined is whether the reinsurance cycle has changed forever, given these new market realities.