High interest rates put paid to the Class of 2023

There was no Class of 2023 of new Bermuda reinsurers despite the hardest market in a decade because high interest rates, the absence of a single massive catastrophic event and  the growth of the insurance-linked securities market conspired against management teams trying to raise capital. 

That’s the view of AM Best, which has released a report delving into why, unlike previous hard markets, there was no class of new reinsurers in 2023. This contrasted with the classes of 1992, 2002 and 2005, when major catastrophes led to the formation of new companies, many of which now play a leading role in the reinsurance market.   

Of all the causes, AM Best said the spike in interest rates to curb inflation around the world may have been the most significant deterrent to capital raising by new companies. 

 “Perhaps the most significant deterrent to investor capital for start-up reinsurers is the precipitous rise in risk-free rates,” the agency said.  

The tripling in rates on 10-year Treasury bonds means that a new company would have to produce a superior rate of return and would typically be writing catastrophe reinsurance risk which is inherently volatile, it said. 

 Other reasons for the lack of start-ups included the lack of a single large event which shocked the market, unlike Hurricane Andrew in 1992, Hurricane Katrina in 2005 and the September 11 terrorist attacks in 2001. 

“This hard insurance market is different from many of the prior hard markets in that it was not caused by a single large loss, but by the accumulation of a series of property catastrophe events which led to significant underwriting losses and resulted in earnings events for almost all reinsurers,” AM Best said. 

“Regardless of the causes and differences with prior hard reinsurance markets, the market has hardened and it will take at lest a few years for pricing and conditions to soften. And yet, no new reinsurers were formed to capitalise on the turning market. 

“This was not for a lack of effort or talented executives as some high profile management teams publicly announced their intentions to form new reinsurers while many more were rumoured to be seeking finding. Ultimately, none of the potential entrants have made it past the fundraising stage.” 

Am Best said start-up teams also struggled to attract venture capital investments which proved to be a stumbling block as other investors from sovereign wealth funds, endowment and pension funds made commitments from venture capitalists a condition of investing. 

The ratings agency said the success of some established re/insurers in raising new capital was also a deterrent because there was no certainty start-ups would survive competition once the market turned.

The ratings agency said the increasingly sophisticated ILS market meant investors were able to participate in the hard market while limiting their investment time horizons. 

“Investors currently have the opportunity 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 agency added. 

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

AM Best asked: “Even with well experienced management tams with proven tracks records, how sustainable are the currently favourable reinsurer and capital market conditions compared to the required typical holding period of new reinsurer capital commitments? 

“After several years of the heard market cycle, the time horizon to launch and fund a start-up reinsurer is narrowing -  which benefits the existing rated reinsurers and LS market participants.” 

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