Reinsurers See Record Returns, but New Reinsurer Formations Lag

Despite achieving the highest returns in 3 decades, the reinsurance sector has not seen the expected emergence of new companies, an A.M. Best report reveals. The report, titled The 2023 Reinsurer Class: The Class That Never Was, highlights that despite existing hard market conditions, a new class of reinsurers has yet to materialize.

In past years, a large-scale loss has precipitated the shift by depleting existing capital and forcing reinsurance prices higher, typically whetting the appetite of investors in the process.

"A class of start-up reinsurers usually quickly forms to capitalize on the interruption in the reinsurance demand-supply equilibrium," said Dan Hofmeister, associate director, A.M. Best. "Many of these new reinsurer formations merge or are acquired as the market cycle returns to the soft phase of the cycle."

Historically, significant market disruptions, such as major catastrophe events, have led to the formation of new reinsurers. Events like September 11 and hurricanes Andrew, Ike, Katrina, Rita, and Wilma have previously triggered new market entrants. However, the current hard market, driven by a series of property catastrophe events rather than a single large loss, has not sparked similar interest.

Since 2017, elevated property catastrophe activity and a rise in secondary perils have driven reinsurance pricing higher. This trend continued, albeit slowing, through the June 1, 2024, renewal period, leading to improved reinsurance contract terms and conditions. Despite these favorable conditions, new reinsurer formations have been slow to materialize.

"A.M. Best has issued a number of preliminary credit assessments on business plans from high profile management teams, which have had similar difficulties in fundraising," said Carlos Wong-Fupuy, senior director, A.M. Best.

Large passive capital investors, such as sovereign wealth funds, endowments, and pension funds, maintain a healthy interest in the industry. However, private equity and venture capital investors seem less inclined to support new non-life reinsurers. Competitive conditions and the availability of insurance-linked securities, which may be more appealing in a hard market, are likely contributing factors.

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