New reinsurers would struggle to differentiate themselves

While the 11 September 2001 terrorist attacks on the US and the 2005 hurricane season both generated new waves of reinsurance start-ups, a big event in the remainder of this year would be unlikely to have the same effect, according to Mark Coleman, director, financial institutions rating services at Standard & Poor’s (S&P).

Coleman notes that a big pricing correction in the market following an event or events usually triggers an influx of capital from investors, but he says: “It is difficult to see it going into new start-ups,” Coleman told Global Reinsurance at the Monte Carlo Rendez-vous. “The class of 2005 hasn’t enjoyed the same success as the class of 2001. It is difficult for companies to differentiate themselves, gain visibility in the market and develop the operating platform necessary to compete these days.”

Capital could instead enter the market via insurance-linked securities, for example, or be used to fund sidecar reinsurers.

Absent a market-changing event this year, however, many believe a surfeit of capital will be the industry’s problem. Many reinsurers have sought to return excess capital to shareholders through dividends or share buy-backs.

This practice has not found favour with everyone. Reinsurance broker Guy Carpenter, for example, contends that reinsurers would serve long-term shareholders better by using the capital to innovate or push into new areas.

However, Coleman contends that this is easier said than done. “It’s an overly simplistic view that you can go out and diversify by product, geography or risk and do so successfully,” he says. “There is a fair amount of risk attached to executing on this successfully.”

The cost of getting it wrong can be high. “There are numerous examples of companies diversifying and destroying value,” says Coleman.

Coleman asserts that what constitutes excess capital is up for debate. “Valuations of reinsurers are pretty low, “ he says. “Share buy-backs are a way to appease investors but I would also suggest that investors are reticent to put new capital into the market. There isn’t the confidence that new capital will be available when it is needed.”