There are concerns over how the access of some insurtech firms to reinsurance may be impacted by hard market pricing.
According to analysts, price adequacy and underwriting results may be affected by access to reinsurance capital.
An analyst at Goldman Sachs, who recently had discussions with insurtech companies at a recent conference, laid out where hard market pricing may impact in terms of inflation, capital, and reinsurance.
The analyst said: “Overall the broad group of companies does continue to have access to reinsurance to fund profitable growth. Though the cost of reinsurance is affected by the hard insurance market and inflationary impacts in some lines.”
Around inflation, the Goldman Sachs analyst said that while there is more of a direct impact for property damage geared businesses like home and auto insurance, its contribution to a harder pricing environment in reinsurance has implications for a variety of businesses.
The analyst also said that the cost of capital in public markets has dramatically changed for the industry and our interpretation is that private market capital has also become more costly. As a result, we are finding companies preferring the MGA structure and other alternatives to limit the amount of hard capital being placed behind business in the current environment.
The background to this is that insurtech companies have relied on reinsurers to underwrite their risks, or have operated as an MGA and been capital light while leveraging reinsurance on the back-end. At the same time, the insurtech firms have not been profitable and may struggle as they have been reliant on venture funding. This has led, some say, to a situation where many may struggle to find further financing.
The question is whether with reinsurance rates up considerably, this could pressure some insurtech business models, perhaps even to the point of making them less tenable. Quality is going to really matter, in terms of underwriting results, their access to business the reinsurers want, and their growth.
Some might say that for companies who have robust access to reinsurance and are consistently profitable, remaining an MGA is a good possibility as public investors are now more familiar with MGA structures and other capital light structures. However, if there are any concerns over capacity, full stack insurer capabilities may be preferred.
