The logic of the pure-front-plus-ILS model


The logic of the pure-front-plus-ILS model

Jonathan Reiss, chief executive officer of Concert Group Holdings, is in his 30th year of property and casualty insurance, but says that longevity is less about decades and more a matter of accepting the peaks and troughs in the market.

“What makes someone a veteran is the fact they’ve been through the good times and the hard times, and that’s been true for me, for sure,” Reiss said in an interview with Bermuda:Re+ILS.

Part of that journey is understanding re/insurance as the ‘but for’ industry, he said.

“We find ourselves saying: ‘We had a good year, but for that event’, and it’s that which makes it humbling to work in this industry. You hear about black swan events, but they do seem to happen quite a lot!

“Likewise, we talk about modelled events, but there have been plenty of ‘1-in-100-year’ events in my career. That tells you the modelling is not all it’s cracked up to be.

“And it’s an industry that, for the last five to 10 years, has not produced adequate returns for its shareholders; it hasn’t even covered its cost of capital. The point to remember though is that we’re here to support society. In fact, we don’t give ourselves enough credit for the social good we do, and for how we support economic development,” he continued.

“When the COVID-19 pandemic struck, initially the politicians seemed to be gearing up for a fight with the insurance industry; to have legislation that forced insurance contracts to pay out losses related to pandemic disruption.

“The industry would have been badly damaged if punitive legislation had been pursued, so the good the industry does would have been destroyed. The politicians quickly realised, however, that the crisis needed the insurance industry’s help.”

Reiss was part of the founding team at Hamilton Insurance Group and served as its chief financial officer. He was also president for strategic partnerships, which included building out Hamilton’s insurance-linked securities (ILS) platforms, as well as managing third-party syndicate businesses at Lloyd’s. Prior to Hamilton, he was a partner and the head of insurance in Bermuda at EY.

Reiss is himself the son of an insurance veteran, Fred Reiss, who founded Steel Insurance Company of America, a captive developed for an Ohio steel company, from which the term “captive” was borrowed from the captive mines sending ore to the company’s mills. He set up International Risk Management in Bermuda, where the first captives were domiciled.

“My dad was credited with coining the term ‘captive’ when he worked as a broker for the steel company in Ohio,” Reiss said. “Steel companies back then relied on coal and a disruption to supply could shut a factory down, so they decided to protect their supply chain by buying their own coal mines, and they called them ‘captives’ because they belonged to them.”


Measuring success

Back to the present day, Reiss said that another quality of a veteran is being sanguine about what constitutes a hard market.

“Something that makes insurance unique as an industry is that we don’t know the cost of the goods we sell. Most of the time, the premium is a fixed number, or it has parameters around it that are relatively tight,” he said.

“I’ve been around long enough to have seen hard markets, and although we are now in a market of greatly improving pricing, I can’t honestly say it’s a hard market. That to me would be where capital is flowing into the industry because there’s an opportunity and the expectation of outsized returns. Right now, claims inflation could be catastrophic and there’s been a return to large increases in jury awards.”

The industry “still isn’t being paid enough” for catastrophe risk linked to climate change, he said, and there are many “non-modelled perils” generating large losses. Examples include wildfires, the pandemic and fraud. “That’s why, if this is a hard market, then it’s nowhere near as attractive as hard markets were in the past.”

Another change Reiss has noticed is that investors are becoming more demanding of what they expect from re/insurers.

“In the past hard markets, capital inflows were led by certain savvy investors in insurance, such as Warburg Pincus or Blackstone, but there were many others who simply followed those leaders into the market. There was the temptation to get the same playbook out again and again, after Hurricane Andrew, after 9/11, after Hurricane Katrina, because investors had made good returns, but now there’s a greater awareness of industry risks, such as flaws in the modelling.

“In addition, environmental, social and corporate governance policy is front and centre in conversations with investors and everyone’s grappling with it,” he added.

Speedy startup

Concert Group Holdings was formed last year by three other industry veterans as a company dedicated to insurance fronting in partnership with private equity firm Century Equity Partners and insurance holding company WT Holdings. Concert raised capital from its founders: Brady Young, chief executive officer/founder of Strategic Risk Solutions; Wes Duesenberg, chief executive officer of Southern Insurance Underwriters; and Christopher Collins, chief executive officer/founder of Corinthian Re.

Concert provides access to the US insurance market for traditional products and alternative risk transfer structures. In October last year, Concert completed a $100 million capital raise and received an A-rating from AM Best. Concert comprises an Illinois-domiciled admitted carrier, Concert Insurance Company, acquired in 2021 (previously known as CEM Insurance Company), and an E&S carrier, Concert Specialty Insurance Company, domiciled in Montana and launched in December 2021. In April this year, Concert completed its executive management team with the hire of chief actuary Sam LaDuca.

“Most of last year was the startup phase, but things are moving very quickly,” Reiss said. “Objective number one was the raising of capital, and getting a very attractive rating was terrific. Concert Insurance Company is now admitted in 38 states. We’ll have over 40 in a matter of weeks and our goal is 50, but reaching 38 in less than seven months from completing our capital raise represents great progress.

“Our E&S carrier is now whitelisted and otherwise fully approved to write business nationwide, and the E&S market is enjoying remarkable growth. Last year, the E&S market grew in the US by 30 percent and we’re well-equipped to respond to that opportunity.”


Differentiator model

Concert has two features that make it unique, Reiss said. First, it is the only fronting company with a major strategic focus on the captive insurance market. Second, it has formed an ILS affiliate.

That affiliate, called Harmony Re, has a complementary role to Concert, Reiss said. “We like our fronting carrier to be a pure front, which means that risk flows through and is not retained. Most fronting companies are not pure front as they’re normally required to retain some risk. That’s referred to as a hybrid model.

“The reason for the hybrid model is that re/insurers and others ultimately take the risk and want the fronting company to have some skin in the game. That’s fairly common and I have senior underwriters who want that because they believe in their risk selections and they want to retain those risks.

“To solve that we’re keeping Concert as a predominantly pure front, but we constructed Harmony Re with an initially modest investment from Concert’s management team and shareholders. This satisfies the skin in the game that our reinsurance partners want and enables us to demonstrate a track record of underwriting excellence. Over time, Harmony Re will attract third-party ILS capital.”

Most ILS products are geared towards property catastrophe, Reiss noted, but at recent ILS conferences he’s attended, at least half of the discussion was around non-property catastrophe risks, such as cyber.

“You could argue that traditional ILS products were invented 25 to 30 years ago, but ILS became a recognised asset class for pension funds and other institutional investors only in the last 10 to 15 years. ILS has largely been focused on property catastrophe risk, with the theory being that earthquakes and windstorms are not correlated to the financial markets, but what’s changed is that there’s now appetite in the ILS investor community to invest in other insurance risks.”

Concert has been ceding risk into Harmony Re since January 1, 2022.

“Everyone knows that the insurance industry has way too big an expense ratio. For every dollar a consumer pays in premium, you’d like to think that most of that dollar would go to the entity that’s bearing the risk of loss, but that doesn’t happen in the insurance industry because there are commissions and intermediaries taking as much as 50 cents of every dollar,” Reiss explained.

“Who’s paying for that inefficiency? The consumers are. By being a fronting company with an ILS affiliate, we can truncate that chain tremendously.

A big visible example of that is Markel, which bought the largest dedicated fronting company in the US—State National—and the largest ILS platform—Nephila Capital. In recent years, I noticed they made significant redundancies in their reinsurance business. It’s an example of needing a fronting company because you need carriers that have the licensing to write the risk. But if you could pass that risk efficiently, straight into an ILS platform, you’ve created considerable efficiency in connecting insured risk transfer customers to risk-bearing investors.

“Concert is another example of this approach and it’s definitely the future of the industry: a much more efficient linking of the ultimate customer to the capital markets that take the risk. If all of your relationships are just with intermediaries, then you’re vulnerable, whereas the power of Concert as a fronting company is that our clients are the insureds.”

A captive audience

Concert is the only fronting company that has a big focus on captives, through its relationship with Strategic Risk Solutions (SRS)—the fourth largest manager of insurance companies in the world. SRS currently manages over 900 insurance companies, mostly captives, and is the largest independent manager.

“The only organisations that manage more captives than SRS are Aon, Marsh, and Willis, but they are brokers. SRS is not a broker so it was able to co-sponsor the formation of Concert,” Reiss said.

“The leadership at SRS noticed that their captive clients were not being adequately served in the fronting market and wanted to help provide a solution. Among other fronting companies, I don’t think there’s enough of a focus on client service; it’s more transactional. We, however, want to have long-term relationships and we have a ‘client first’ culture. That’s another differentiator between us and others.”

Harmony Re is being managed by both Concert and SRS. It will remain an affiliate of Concert for a number of years, but it may evolve to become its own standalone business with its own management team, and could go public on its own, Reiss said. In the meantime, Concert might assist in ceding certain risks it does not front—such as cyber and workers’ compensation—to Harmony.

“If you’re going to support the captive insurance market, you have to be very broad in your risk appetite. Captives, almost by definition, are often housing risks that the traditional insurance markets aren’t adequately covering. This comes back to the protection gap, and I think Concert and Harmony Re are part of the solution to that, by supporting the captives industry.

“For now, Concert will be focused on US risk and it is a property casualty company, but within that realm we have a broad appetite.

“We’re seeing enough opportunities in lines of business where the losses are more predictable and there is not severity. We’re not fronting much property business where there are very severe loss exposures. We have a huge pipeline of business opportunities so, frankly, we’re able to be highly selective for now. There are two lines of business that we’re not currently writing at all—workers’ compensation and cyber—although we may choose to in the future.”

Concert hasn’t announced the launch of Harmony Re because it has enough business not to need marketing, Reiss said. “The demand and need for what we’re producing is only going to grow and we’re finding that the opportunity is even greater than we expected.”

Passionate about diversity

Reiss is as well-known for being proactive on the topic of racial equality, as he is for being an industry veteran. At Hamilton Insurance Group, Reiss had a kindred spirit on diversity in the company’s chief communications and culture officer, Wendy Davis Johnson. Both are Bermudian and are part of the white minority on the Island.

“There were social advantages from being white and we saw the unfairness and lack of inclusion towards black people in Bermuda’s reinsurance sector,” Reiss said. “I’m more aware of the issues than maybe the average white man sitting in London or in the US because of the makeup of our society in Bermuda.”

He gave a speech at the Bermuda Captive Conference in June 2018, where he “spoke from the heart” about how he had benefited professionally from the privileged position of being a white man on the Island.

“I didn’t say anything controversial, but they were things that not enough senior white men had said. It really resonated and the Royal Gazette picked it up. I got acclaim for saying what I did, but a senior black person asked: ‘Why is Jonathan getting all this credit for saying this stuff, when black people have been saying it for years and been ignored or, worse, told to shut up?’.

“My speech wasn’t to make some patronising observation—I felt qualified speak on the subject. I had had three different bosses for most of my 20 years at EY who were not white men. They felt totally comfortable with that which meant so could I, but I wouldn’t have known how to make sure black men who reported to me felt comfortable having a boss who is white.

“Talking about racial issues is hard and it makes people uncomfortable but it’s especially uncomfortable for someone who is your subordinate.”

Reiss recalled “fascinating conversations” he had with Lorene Phillips, a black Bermudian insurance industry executive who has established her own executive coaching business. Phillips had theories about why black men don’t appear to succeed in the Bermuda re/insurance workplace as well as black women do.

“One theory we discussed is that perhaps white men are much less comfortable giving black men tough and constructive feedback. If I look back on my career, the people who really helped me were the ones who gave me blunt, even harsh, feedback.

“Too often, a black man, instead of being supported and told what he needs to do in order to succeed, is left to flail and eventually leaves or is managed out,” Reiss said.

“In Bermuda, our society is badly damaged by the history of institutional racism and slavery, and as a society we haven’t recovered from that. I care deeply about the future of Bermuda for my children, and more of us need to stand up and make changes.”

Reiss highlighted the value of unconscious bias training, not only for racial diversity, but also for gender equality.

“It wasn’t until 15 years into my career that, thanks to unconscious bias training, I became awake to the bias implicit in the activities I would arrange for my clients at EY in New York, such as going to watch the Yankees play.

“Attending a baseball game is an example of a cultural activity biased towards people who are ‘white’ and ‘male’, and that’s because our industry has deep-rooted cultural behaviour geared towards the advancement of white men,” he explained.

His passion for diversity stems from more than growing up as part of Bermuda’s white minority. It was also formed from the fact that his father’s working-class background was a potential impediment to success when he arrived in Bermuda in the 1960s. Although there were some forward-thinking individuals, the business community on the Island was an “inward and protectionist boys’ club”, Reiss said.

He told the 2018 summit: “Bear in mind that my father was a white male whose ideas brought prosperity to the Island. If he was shunned, can you imagine what it was like to be a woman or a person of colour in that environment?

“Unfortunately, the shameful legacy of the past, its patriarchy and the economic disparity it fostered remain unresolved today. There’s work to be done.”

Jonathan Reiss, Concert Group Holdings, Insurance, Reinsurance, ILS, Fred Reiss, P&C, Chicago, Bermuda, economy.

Bermuda Re