Current hard market challenges new reinsurer entries

Mainly these are competition, capital raising, and higher barriers to entry.

Unlike previous cycles, the current hard market stems from a series of property catastrophe events causing underwriting losses. Despite these changes, no new reinsurers have formed. Strong leadership teams have struggled to secure commitments from private equity or venture capital partners, despite interest from large, passive capital investors, AM Best assessed.

Several factors contribute to the lack of new entrants: competition in the reinsurance market, the ability of established reinsurers to raise significant capital, and the higher barriers to entry. Historically, reinsurers could enter the market with $1b of equity, but today, this amount places them lower in market rankings, making it harder to compete and attract private equity investment.

Established reinsurers with operational platforms offer less risk for investors. The availability of insurance-linked securities (ILS) also makes the current hard market attractive. ILS products, valued at nearly $100b, provide a concentrated investment opportunity. 

The CAT bond market has seen significant growth, with $8.2b in new issuance in second quarter (Q2 2024), contributing to a record $12.6b through June.

Investors prefer ILS products or established reinsurers' balance sheets over new start-ups. Rising risk-free rates since 2022 have also increased the minimum return required to justify investor risk. 

A new reinsurer would need to offer substantial returns to attract investors, which remains challenging.

Given the current hard market cycle and favourable conditions for existing reinsurers and ILS participants, the formation of new reinsurers is unlikely. 

Existing reinsurers and ILS market players are expected to benefit from the capital allocation, enhancing their returns and positions. It remains to be seen if any new management team can overcome these challenges to secure funding before the market softens.

The insurance industry, particularly reinsurance, is cyclical. Currently, the reinsurance market is experiencing a hard market, yielding risk-adjusted returns not seen since 1993. This improvement benefits almost all reinsurers by enhancing returns on surplus and capital.

A hard market typically follows a significant loss, leading to underwriting losses and surplus erosion. This attracts investors to the reinsurance market for potential high returns. Often, new reinsurers emerge during this period but later merge or are acquired as the market softens.

Historically, events like the Glarus fire (1861), Hurricanes Hugo (1989) and Andrew (1992), 9/11, and Hurricanes Katrina, Rita, and Wilma (2005) have triggered market shifts. However, the current hard market lacks new reinsurer formations.

Increased property catastrophe activity since 2017 and secondary perils have improved reinsurance pricing and terms, continuing through the 1 June 2024 renewal. 

Capital market volatility due to rising interest rates in 2022 led to a significant loss in available capital. 

Although temporary, these losses required higher underwriting income to compensate investors, creating a chaotic market and widening the gap between reinsurance sellers' and buyers' expectations. This generational hard market is expected to continue through at least 2025.