One of the maxims of the 2023/24 hard market has been that reinsurance start-ups are over.
But even if it is not a de novo start-up, Canopius Re CEO Charles Cooper said he sees his mandate to build out the firm’s reinsurance business in a similar light, as a “virtual start-up".
Cooper joined the firm in mid-2023, and significant hiring to bolster the firm’s ranks in Bermuda and elsewhere has already occurred, with some new senior executives set to start around conference season.
Canopius is one of those closely watched (re)insurers that have been in scale-up or start-up mode since 2020 and are expected to look for recapitalisations – either public or private sales – to give existing investors liquidity in the next couple of years.
However, its willingness to lean more heavily into the volatile reinsurance segment while also preparing for these events marks it out somewhat within this group. Peers in this camp include Aspen – which is certainly a major reinsurance player, but this has been the case for a long time – and Inigo, which is much better known as a London market insurer.
Canopius Re’s Bermuda business expects to focus heavily on quota-share business, which, arguably, is closer to giving it another way of leveraging primary market growth.
But this is not exclusively the case, and the firm is planning to build its XoL book in Bermuda in what it says will be a complementary add-on to its existing Lloyd’s portfolio.
Moreover, Cooper said he believes that, even in a world of increasing scale of (re)insurer carriers, there are ways smaller-sized or scale-up reinsurers can make themselves relevant.
Alternative leverage
Cooper acknowledged that, for Canopius Re – currently $800mn in premiums – scale and competing against the major reinsurers are “just not going to be our game”.
However, he said the firm can use its “disadvantage to its advantage” in that “we’re small, but we’re also nimble”.
He added: “Leverage works both ways. We may not have leverage against buyers, but the same thing is true in that we're not going to leverage positions against buyers when we're trying to write business.”
But while Canopius Re will pick and choose the reinsurance programmes it supports, Cooper said that, where it is participating, the company wants to ensure it is relevant.
“We don't want to just fill out slips. We don't want to be the last half a point on a giant cat placement – we would rather try to be somewhat relevant with how we transact on a relatively limited number of reasonably sized – for our company – transactions.”
Building in a transitioning market
Questioned on how difficult it might be for Canopius to keep growing in reinsurance as the post-Hurricane Ian hard market plateaus, Cooper said he believes several key trends will maintain momentum.
On the property side, he said new demand is set to continue for several years at least, if not “in perpetuity”.
“It has to [keep rising] because of the compounded impact of inflation, exposure growth and the changing hazard [related to] climate change.”
Pricing may come under pressure as supply returns, but, he said, for now, it remains adequate, and additional demand should enable the firm to grow its property book.
Meanwhile, casualty momentum is “really picking back up”, he added, noting that an Insurance Insider piece on casualty-risk fears was “about the 20th headline like that I've seen in the last couple of weeks”.
He added: “There's a lot of fear in the casualty world, so there's a lot to play out there.”
Finally, on specialty reinsurance, the growing cyber and agricultural markets are two key segments Canopius is targeting for ongoing expansion, as it already has more than $80mn premium in an agricultural book written out of Singapore.
“It will continue to grow just based on the impact of climate change right now,” Cooper said. “Precipitation is quite remarkable, in terms of places that have been dry for years are now experiencing floods like [those that] happened in Dubai.”
More generally, the former Axa XL reinsurance CEO, who experienced the impact of M&A when Axa acquired XL Catlin, sees M&A activity as a driver of opportunity.
Consolidation of large insurers, which can provide reinsurance efficiencies, is a negative for their reinsurers. But, on the other side of the coin, as some reinsurers get increasingly bigger, this drives buyers to reconsider their counterparty concentration risk and look to build extra diversification into their panels, he said.
“That does also create opportunity for smaller reinsurers looking to grow and build out like we are in terms of that counterparty concentration risk.”
Opportunities and risks
Climate change is the issue Cooper earmarked as the biggest opportunity for reinsurers, both in terms of the need to protect property but also more generally with regards to climate-change transition and clean energy.
However, clean-energy developers cannot expect reinsurers to “subsidise” initiatives, he said. “What we can do is try to facilitate and help and take some of the volatility and uncertainty out of it.”
On the flip side of the topic of opportunities, Cooper believes one of the biggest – “or least understood” – risks facing reinsurers is the industry’s strong levels of capitalisation. Excess capital, ostensibly a strength for the industry from a ratings perspective, clearly drove the soft market to an unsustainable low in the late 2010s into the early 2020s.
However, two years after Ian – the last-straw loss that helped spark a harder market – Cooper said the industry “take[s] for granted that we are very well capitalised right now... and that dynamic in our ability and access to capital is something we should be very careful of”.
Cracks are already showing in the lack of new investors lining up to form reinsurers, as well as in the difficulty it presents to get US investors interested in the space.
“We need to be very mindful that we treat our capital providers with the kind of returns they should expect for the type of volatility we provide,” Cooper said.
To this end, he said that, while the direction of reinsurance rates will rest on supply and demand factors, the more important factor is that reinsurers stick to the “great reset” of attachment points.
“People are now using reinsurance for what it should provide” – in other words, as a lower-cost capital source and as protection against true volatility risks.
“I don't think any of that changes anytime soon, but the fear/greed pendulum... it's returning from being hard on the fear side, and people are starting to get greedy because they made a bit of money this year,” he said. “People have short memories in this business.”