Gallagher Re calls for nuanced view of PE-backed reinsurers

Critics warn of short-term profit strategies risking stability and trust.

Not all private equity-backed (PE-backed) reinsurers are equal, and scepticism should not be automatic, pressed Gallagher Re. Cedants must conduct thorough due diligence, especially given limited public information on privately held companies. 

The infusion of significant PE capital into the insurance industry over the past decade has sparked debate, wrote Brian Lo, senior vice president of Life Solutions Group in his insights report.

Some argue that PE-backed reinsurers' investment expertise improves the economics of asset-intensive insurance products, leading to more attractive pricing and industry growth. 

However, critics raise concerns about short-term profit-seeking strategies that may compromise stability and good faith.

ALSO READ: New equity requirements to foster competition in Indonesia's takaful sector

Gallagher Re advocates for a nuanced perspective. Whilst some PE-backed reinsurers may face challenges akin to startups, others can offer long-term partnerships as effectively as traditional reinsurers. 

PE-backed reinsurers play a vital role in asset-intensive transactions, but their particular risks must be considered.

Assessing PE-backed reinsurers involves examining the "Five Cs of credit" modified for the insurance context:

• Collateral: PE-backed reinsurers often pursue aggressive investment strategies for higher yields, necessitating confidence in their investment capabilities. Governance of portfolio management is crucial to mitigate downside risk.
• Capital: Domiciling in offshore jurisdictions does not necessarily indicate regulatory capital minimisation; other reasons include flexibility for international reinsurance. Cedants must ensure robust capital definitions and protection against erosion.
• Conditions: Reinsurance treaties should include provisions for portfolio deterioration protection, capital requirements adjustments, and considerations for regulatory changes.
• Capability: Whilst PE-backed reinsurers may have bright and ambitious employees, concerns include external focus on deploying investor capital and talent acquisition that could strain internal resources.
• Character: Cedants should conduct due diligence on potential partners to assess their moral compass and reputation, considering prior experience, industry profile, and market feedback.