Reinsurance start-ups: new kids on the block

Vol 47: Issue 1 | April 2024

As a succession of storms, earthquakes, fires and other natural or man-made disasters lash the planet, it seems an inauspicious time to be launching a new reinsurance venture.

However, insurance industry veteran Brian Duperreault appears undaunted.

The former CEO of AIG, Marsh McLennan and ACE is spearheading a new reinsurance start-up, Mereo Advisors, which plans to draw inspiration from the structure of hedge funds to build a highly diversified portfolio as a way to spread risk and outperform the market.

Aiming to launch in the first half of 2024, Mereo has been accumulating a portfolio that spans underwriting in up to 30 different classes of business, including auto, professional liability, commercial property, surety and crop insurance.

In a recent interview with Insurance Insider, Duperreault said that underwriting was “paramount” to Mereo’s approach.

Bearing this out, experienced underwriter David Croom-Johnson — former AEGIS London CEO — has been recruited as the start-up’s founding chief executive.

More to come in Q2

Mereo is not the only new reinsurance market entrant.

In the second half of 2023, two former senior insurance executives, Willy Zeller and Steve Arora, were actively fundraising for their own Switzerland-based start-up, Alpine Re, with a target start date of 1 April.

As with Mereo, Alpine has espoused a focus on underwriting, rather than asset management.

Zeller told media that the timing for a new entrant “focused on strong fundamentals — maximising underwriting profit and practising exceptional cycle management … is perfect now”.

On this score, Zeller could be on the money.

After several tough years through to 2022, conditions for reinsurers have improved, according to Gallagher Re.

“Only 12 months ago, property catastrophe reinsurance was considered an unpredictable and volatile class warranting reduced capacity and changes in coverage, attachment and pricing,” says Gallagher. “[But since then] property supply has snapped back into balance.”

According to Gallagher, the turnaround delivered returns that exceeded the increased cost of capital in the first three quarters of 2023.

Despite the challenges the reinsurance sector has faced, it has achieved an average annual total shareholder return of between 10 and 12.2 per cent for the past decade, compared with between 3.9 and 9.4 per cent for the insurance industry as a whole, according to Boston Consulting Group (BCG).

This performance has mainly been achieved by reinsurers directing cash flow into dividends and share repurchases, says BCG, warning that the depletion of reserve buffers in recent years will require a different approach.

Climate concerns

While BCG expects that a sustained trend to higher rates will reduce reinsurer risk and boost returns, the effects of climate change loom as a major concern.

“There is no doubt that the threats to lives, infrastructure, assets and businesses will have an expanding impact on the balance sheets of primary carriers and reinsurers alike,” it says.

BCG cautions that the highly random and unpredictable nature of storms, fires and other climate change-related disasters make it difficult to determine whether rates are adequate.

The structure of portfolios, including a diversified set of exposures, could be key to helping manage those risks and sustaining profitability. If so, Duperreault’s new reinsurer is adopting the right underwriting approach by building a portfolio featuring multiple business classes.

“The good news,” notes BCG, “is that market trends over the next two to three years appear positive for reinsurers that have the market access, available capital and product depth to play in the most attractive reinsurance lines.”

Australia, a tough nut to crack

KPMG insurance partner Scott Guse has words of warning for any new reinsurer looking to break into the Australian market: it is going to be tough.

Signs of strengthening investor interest in the reinsurance market, supported by the prospect of improved returns on equity, have encouraged the appearance of a number of start-ups internationally, including several promising a much tighter focus on underwriting and portfolio diversity.

Australia is an attractive market for incumbents as well as new entrants because, in addition to its wealth, stable and well-regulated financial system and relatively deep capital markets, it is in the southern hemisphere.

For firms with the bulk of their portfolio involving exposure to markets in the northern hemisphere, Australia is a handy way to spread and diversify their risk.

“Australia is a diversity play,” says Guse. “Because it is in the southern hemisphere, major catastrophic events happen here at a different time to the northern hemisphere, so it is a way to spread risk.”

But he is sceptical about the chances of new reinsurers establishing a significant presence in Australia’s highly regulated market any time soon.

“[Australia] is not a very conducive market for new entrants,” he says. “Only the very strong, credit-worthy firms can operate [and] most of those with the ability to fit the bill are already in the market.”

The overriding reason is the stringent standards for reinsurers that are set and policed by the Australian Prudential Regulation Authority. Reinsurers need to meet tough capital adequacy and credit rating requirements in order to satisfy the regulator that they will be able to meet their obligations.

Guse says these demands set prohibitively high barriers for any new entrant to clear. “You would not start up in Australia,” he says bluntly.

Any new entrant is likely to be the offshoot of a global firm imbued with the capital reserves and credit standing to meet regulatory standards.

The fact that the composition of Australia’s reinsurance market has remained very stable over a sustained period is testament to the difficulty of breaking in.

Guse cautions that any new entrant would need to have not only deep financial reserves, but ample patience. They would need to “take it slowly”, he says, not least to build up the depth of knowledge needed to understand the market and accurately assess and price risk.

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