TechTalk: Reinsurance rate hikes hit insurtechs – but opportunities await

At the start of 2023, many firms would have seen some of the highest reinsurance rate rises in a long time.

According to Howden’s The Great Realignment renewals report, published 1 January 2023, this was the result of economic headwinds, such as a 40-year high in inflation, and geopolitical events like the Russia-Ukraine conflict having an impact on energy markets.

Natural disasters also played a part – for example, Hurricane Ian, which struck in September 2022, resulted in billions of pounds in claims costs.

This all subsequently led to one of the hardest property catastrophe reinsurance markets witnessed in a generation during 2023 – and this has had a knock-on effect on insurtechs relying on capital from reinsurers for survival. 

And GlobalData noted at the beginning of December 2023 that deal volumes for insurtechs dropped from 207 in 2022 to 167 this year – this included venture financing deals, mergers and acquisitions (M&A), private equity, initial public offerings (IPO) as well as other deals.

Andrew Caswell, director of insurance consulting at Pricewaterhouse Coopers (PwC) UK, told Insurance Times: “Over the last seven years we’ve seen the worst run of catastrophe (Cat) losses in the market.

“Because of that, property treaty reinsurers have failed to make money, so you see capacity being pulled and rates going up significantly.

“A lot of what’s driving those Cat losses are secondary perils – wildfire and non-damage business interruption. Weather is becoming more and more severe, the nature of risk is becoming more connected, therefore a natural catastrophe event is having much greater secondary effects than they have done historically.”

Pressures

Caswell further explained that a rise in reinsurance rates could put more pressure on profitability.

For example, he noted that insurtechs operating as carriers ”typically have a very high proportion of that book reinsured”.

“Therefore, as a result of reinsurance rates going up, that is putting additional pressure on the profitability,” Caswell said.

And Robert Mazzuoli, director of Europe Middle East and Africa (EMEA) insurance at Fitch Ratings, felt that higher reinsurance rates may negatively affect those insurtechs that assume insurance risks on their balance sheets and then pass them on to reinsurers.

“Higher reinsurance cost may force them to raise prices themselves, making them possibly less competitive,” he added.

Meanwhile, with interest rates having increased since 2022, Caswell warned that investors were ”now looking harder at where they invest and make returns”.

”Reinsurers are a significant provider of capacity of capital, so that could be having an additional negative effect on the availability of market capital because it has definite constraints,” he added.

Deal value

Despite these pressures and a drop in deals year-on-year, GlobalData highlighted there had been a noticeable shift towards higher-value insurtech transactions, with deals being valued 39% higher than in 2022.

For example, the firm cited that artificial intelligence (AI) has grown in deal volume by 15.9% and deal value by 13.6% since last year, with it reaching $2.9m (£2.3m) in 2023.

Meanwhile, deals around the Internet of Things (IoT) have also shown “significant growth”, according to the firm, with deal values reaching $620m (£493m) so far this year, suggesting “growing interest”.

And while deals may have dropped globally, Gallagher Re’s Global Insurtech Q3 2023 report, which was published on 2 November 2023, revealed that the UK came second in terms of the most active nations for insurtech funding, boasting 11 deals and $579m (£471m) of capital raised.

Charlie Hutcherson, associate analyst at GlobalData, felt that while the quantity of deals had decreased, there was a “simultaneous increase in the scale of investments, potentially signaling a strategic focus on larger and more impactful ventures”.

“The insurtech sector in 2023 demonstrates a mixed landscape, marked by a decline in deal volume and an increase in overall deal values,” he added.

”The trends in key technologies underscore the dynamic nature of the industry, indicating potential shifts in priorities and preferences.

“It is crucial to acknowledge that the full-year data for 2023 is yet to be finalised and the end-of-year statistics may provide additional insights into the sector’s performance.”

Protection gap

Meanwhile, Caswell said that rising reinsurance rates, coverage being scaled back and limits being applied, could see “opportunities opening up for new and innovative products to fill that protection gap where reinsurance might have played a role”.

“Specifically, parametric insurance can play a role,” he said.

”We have seen players like Blink move into parametric – that drive is filling the protection gap left by reinsurers pulling back coverage.”

A parametric insurance model is where the trigger and claims payout are preset, meaning claims processing time is reduced.

Caswell also argued that if claims inflation makes it more difficult to get certain types of coverage, there will also be opportunities for insurtechs in the prevention space to alleviate claims frequency.

And he felt the other area insurtechs can excel at is understanding granular risk and data.

This could then lead to firms setting up their own captives – an insurer that is wholly owned and controlled by its insureds, with a portion of the risk being self-insured.

Concluding, Caswell predicted in 2024 that there “will be less rate push and a bit more capacity in the market”.

“There are fundamental aspects of risk that we still don’t understand well enough, which are driving significant insured losses,” he said.

”The rating environment in the market will remain and there will be a hard market for a couple more years.”