There is a recurring observation that Adrian Jones and Matteo Carbone have included in all of the articles about financial results they have written this year: Reinsurers are paying much of the underwriting losses of the VC-backed InsurTechs. (Latest article, “‘He’s Gaining on Us?’ An ‘Inconceivable’ Quarter of InsurTech Carrier Financials)
And executives of the companies are quick to point to the role their reinsurers play in keeping them afloat in their messages of transparency to consumers.
But how much does the early lack of profitability of startups like Root and Lemonade matter to their reinsurers? Is it just a cost of doing business in order to be able to align with a high-growth cedent when soft-market pressures challenge traditional parts of the reinsurance market?
“I cannot comment on what specific reinsurers are doing, but in general, I suspect that reinsurers see an opportunity to learn from startups by participating on the reinsurance programs and in so doing better position themselves for opportunities in their traditional markets by understanding what’s going on at the cutting edge,” Jones responded.
“As a startup grows exponentially, however, if they are loss-making, they will rise on reinsurers’ lists of loss-making accounts.
“I advise startups to engage with a limited number of reinsurers with whom they get along very well and have them as investors as well as reinsurers. Even if the loss ratio runs a bit hot, if the reinsurer shows a paper gain on the investment, the startup may have more runway with their reinsurers to pursue growth,” Jones said.
Carbone said the opportunity for reinsurers to learn to do things a different way by reinsuring InsurTechs “is massive,” referring to the potential to apply newfound knowledge back to their core business. “So, a few million dollars of losses on the book with the startup doesn’t matter. They can even, in some ways, bring the culture of innovation within their organization,” he said. “Those two elements have an extremely high value.”
“Unfortunately, I have seen that in many reinsurers’ relationships with startups, they have not exploited these values. They are not forcing the startup to share a lot with them. [And] there are many Chinese walls within the reinsurers’ organizations,” Carbone said. “In a large, complex organization like a reinsurer, this information, that culture, just has not circulated.”
“So, as of today, there is an extraordinary potential opportunity, but it is largely wasted,” he said.
Jones, who has worked at two reinsurance companies during his career, sees some validity in Carbone’s critique. “A reinsurer who works with startups with the intention of making their organization smarter needs someone to propagate the necessary capabilities within the organization while respecting client confidentiality.”
“Reinsurers are building a capability to work with younger companies so that the relationship works for both parties over the long term. Part of my role at SCOR is to bring that capability to local market leaders and partner with them to execute deals.”
Carbone described reinsurance coverage of startup losses as a “ticket to the party” of technology-based innovators in insurance.
How valuable is that ticket? Are reinsurers willing to pay a lot of money going forward to have that ticket? Or are startups overestimating the desire of reinsurers to participate?
“It used to be that reinsurers would use so-called ‘startup loads,'” Jones noted. “Reinsurers would basically say, ‘These folks are a startup. They don’t have a track record. And therefore we’re going to assume that the loss ratio is going to be some amount higher than the industry average or than what an actuarial analysis would indicate.
“In the last two years, it seems almost the opposite. I wonder if there’s a startup credit,” he said.
Are startups taking their credit-granting reinsurers for granted? The CEO of Lemonade, for example, has said, “If there is underwriting profit, it is donated to nonprofit. If it isn’t and there are insufficient funds, the reinsurers have a bad day, not Lemonade.”
Jones believes the situation will normalize over time—one in which reinsurers recognize again that startups are inherently risky ventures. “It’s really difficult for a startup to produce good numbers right out of the gate. Therefore, the reinsurer should be appropriately skeptical, as should the startup’s management. If everyone goes in with the right expectations, the relationship can work despite inevitable early hiccups,” he said.