Capital to enter via sidecars & collateralized, rather than “Class of” startups: S&P

Because the current hard market in reinsurance is largely focused on the shorter-tailed lines of business, like property catastrophe risks, Taoufik Gharib, Senior Director at S&P Global Ratings, said today in Monte Carlo that capital may choose to enter through sidecars or collateralized reinsurance instead of new reinsurer startups.

Discussing the chance of new reinsurance startups emerging and whether we’ll see a “Class of” 2023 or 2024 reinsurance ventures emerge, Gharib seems unconvinced.

There have been recent reports of reinsurance startups in the works, but they are now even more limited than we saw a year ago, with many business plans actually just a rehashed version of what has come before, or an update on plans that did the rounds of private equity investors in recent years.

Gharib told the audience assembled at an S&P Global Ratings event in Monte Carlo at the 2023 Reinsurance Rendez-Vous today, “Historically we’ve seen, whenever there is a hard market or major event, there’s a new class of reinsurers that come in with us, such as after 9/11 or KRW in 2005. But we have not seen those, let’s say, around this hard market.

“We’ve we’ve seen some startups, but not, let’s say massive number of startups. ”

But, Gharib does believe capital will come in and suggests its more likely to be seen in more efficient structures, more suited to a hard market in short-tail reinsurance lines.

“Starting a reinsurance company to write property cat, I think it’s probably more efficient doing it through other structures, whether it’s a sidecar other vehicles. Because then when the pricing, you know starts softening, it’s more efficient to manage to manage that.

“If you establish a reinsurance company, let’s say with a strong balance-sheet, a strong management team in place, yes, you can ride that wave of the hard market but then what’s after that, so you have to diversify and you have to expand to other lines of business,” he explained.

Gharib of S&P went on to state, “It seems like it’s more challenging nowadays, to build a strong franchise where it is diversified on a global basis. It doesn’t mean it won’t happen, I mean, there are examples out there of course.

“But just, we’ve seen the case after 2005… because ultimately investors need an exit strategy, and the IPO market might not do well, especially if the company’s not performing well.”

He reiterated, “If it’s just a hard market in short-tail lines, I think we’ll see potentially capital come into other vehicles, like collateralized reinsurance or sidecars, because it’s probably more efficient.”

Qualifying it again by saying that, “But that doesn’t mean that we won’t see other startups. If there’s a strong management team with a strong business plan, it’s not just about property cat, it’s about building a case for a stronger franchise with multiple lines of business, that can actually compensate when there’s a soft price environment in the short-tail lines.”