A new wave of P&C insurers
Following the “Class of 2020”, there continues to be a trend of new property and casualty (P&C) insurers entering the market to challenge incumbent carriers, Debevoise & Plimpton’s Clare Swirski and Benjamin Lyon take a look at the new wave of P&C insurers.
From new carriers focusing on underwriting complex specialty risks across a diversified range of business lines, to those looking to be more specific in their coverage by underwriting for e.g., property catastrophe reinsurance and specialty reinsurance across P&C classes, there is no shortage of new P&C insurance start-ups entering the market.
By and large, these start-ups are led by industry veterans who are seeking to capitalize on opportunities in the P&C insurance space that have arisen from hardening rates and a favourable underwriting environment to scale ups of existing platforms (including insurtech platforms), however we are also seeing incumbent insurers coming under pressure from mature insurtech ventures.
Apart from new start-ups, there is also a trend of existing insurance companies expanding into the P&C insurance space by acquiring existing businesses or syndicates and drawing on their business capabilities. The process of acquiring and potentially repurposing existing businesses offers a way for insurers to gain exposure to a sector in a way that minimizes the level of start-up execution risk that might otherwise be significant. A good example is ERS’s announced expansion plans with Arcus in 2021, where ERS acquired the business capability of Arcus to expand its core motor business to enter specialty commercial insurance lines.
Drivers of new entrants to the market
The most significant factor that has contributed to the rise of these new P&C firms is the obvious financial and market opportunities that presently exist. Hardening rates in the P&C insurance space, in light of the Covid-19 pandemic and an increase in the number of weather-related catastrophes (as climate change accelerates), have created profitable market and underwriting opportunities.
Moreover, as established carriers retreat from high risk lines, this has allowed industry veterans to set up their own firms to underwrite such risks free from historical operational and claims baggage. In addition, these new firms, along with their financial backers, are free from incumbents’ financial and renumeration constraints and so are able to offer significant financial incentives to senior underwriters and their teams.
There are also other drivers, such as the fact that these new firms do not face the problems of legacy operational and IT systems that the more established carriers suffer from. On the flipside, the use of new IT or cloud-based systems to facilitate operations does entail certain execution risks for these new ventures.
Another driver is that these start-ups are better placed to leverage advanced technologies (such as interactive real-time applications and blockchain/smart contracts) in order to meet the demands of customers who are seeking more personalised and cost-efficient products and services.
How (and from whom) are they raising funds?
Most of the invested capital in these new firms have typically come from financial sponsors and private equity.For example, in January 2022, Accelerant, a tech-driven P&C carrier which provides capacity to managing general agents and programme administrators, raised more than $190mn from investors like Eldrige, Deer Park and Marshall Wace. Also, in February 2022, global investment firms Hellman & Friedman and The Carlyle Group committed additional capital of $200mn in Vantage Risk, a firm which specialises in the underwriting of catastrophe reinsurance and specialty reinsurance.
Venture capital has also been a key provider of fundraising capital to these new firms. For example, in December 2022, Forepoint Capital, MTech Capital and Stone Point Capital were contributors of a $50mn fundraise by CyberCube, which focuses on risk cyber analytics and allows insurers and brokers to better understand their portfolio’s cyber risk exposure. In June 2022, Artificial Labs, which provides insurers with a digital and algorithmically driven platform to better underwrite risks, secured £9.5mn in funding from Force Over Mass Capital and existing investors such as Mundi Ventures, No.9 and MS&AD Ventures in its Series A funding round.
However, given the current economic outlook, it is expected that most growth-stage start-ups (not only within the P&C space) will find it challenging to raise funds or find themselves subject to enhanced diligence by investors.
What are they doing to ensure longer-term success?
These new P&C firms are actively embracing opportunities and finding ways to navigate the challenges to the sector.
Embracing Opportunities: For one, these firms have leveraged on technology to increase their underwriting capability and efficiency. Corvus, for example, is actively expanding its data-driven insurance policies and capabilities by investing in the use of novel data and AI to predict and prevent commercial insurance claims, producing a differentiated experience for policyholders, brokers and the Corvus underwriting team.
These firms have also invested in partnerships to improve their internal IT and operational systems. McKinsey reported that insurers with more sophisticated IT capabilities have an obvious advantage in terms of agility, growth and cost ratios and are better able to match the increased need for digital offerings. For example, in August 2022, Convex made a strategic investment into Quotech, an insurtech company that provides custom-built technology and data platforms to support underwriters and distributors in the insurance sector..
However, these new firms will also have to manage the execution risks that come with these new technological systems, whether that may be in terms of budgetary overruns or general operational risks.
Finally, these firms are taking advantage of the availability of capital in the market. For example, in September 2022, US-based Pie Insurance, which provides workers’ compensation insurance to small businesses, raised $315mn in its Series D funding round, suggesting that there continues to be strong fundraising opportunities for firms with a positive business plan to present to financial sponsors.
Addressing Challenges: One key risk that these new P&C firms will have to address is the evolving regulatory landscape. For example, over the course of 2022, the PRA and HM Treasury have published various regulatory updates on UK Solvency II, Eiopa has issued guidance on how insurance undertakings on how to reflect climate change in the Own Risk and Solvency Assessment and the FCA have released a discussion paper on the potential regulation of AI in financial services. These firms will need to stay atop of these regulatory changes to avoid being subject to fines or other penalties.
Another significant risk that these P&C firms will have to manage is the effects of climate change. According to the SwissRe Institute, there has been an increase of between 5 percent and 6 percent each year over the past few decades with regards to insured losses stemming from climate change and weather-related events. These new firms will have to manage this risk by adopting better prediction models when providing climate-related coverage. We believe that these firms will increasingly rely on strategic partnerships with tech companies such as Salient Predictions, which combines ocean and land-surface data with machine learning and climate expertise to deliver weather-related predictions.
Finally, these firms will have to navigate the challenging conditions we are seeing across the insurance market. The slowdown of the economy and inflation means that fewer commercial and individual insureds have money to allocate to insurance. Coupled with the increase in prices for P&C insurance coverage in general, we may see insurance demand suffer during this recessionary period. We think that start-ups and their backers in the P&C space will continue to commit capital but in a more calculated fashion, focusing on segments of the market that have a stronger potential for growth.
Will we see a class of 2023 of start-ups emerge?
We believe that a class of 2023 of start-ups will emerge, especially given the opportunities that exist and the capital that is available. Examples of bright spots include E&S, Specialty, US Catastrophe, Directors and Officers Liability and Financial Lines Insurance. The trend of executive teams moving out of more established and incumbent insurance companies to start their own projects may also continue to support the rise of new start-ups in the P&C insurance space.
However, there are also factors that may slow this trend. For example, there are inevitable execution risks that will have to be borne by these new start-ups, whether they may be specific operational risks or wider macroeconomic risks (such as geopolitical uncertainty, challenging economic climate, and continued rising interest rates in the near term).
Clare Swirski is an international consultant in Debevoise & Plimpton’s London office. Her practice focuses on advising insurers and other financial institutions on a range of transactional and regulatory matters.
Benjamin Lyon is an English – and New Zealand-qualified international counsel in the Corporate Department and a member of the firm’s Financial Institutions Group