GC’s Aronchick: Reinsurers more focused on driving UW value than equity returns

Guy Carpenter’s North America insurtech head Max Aronchick has said that reinsurers are approaching underwriting insurtechs on their own merits and the same as any other cedant, with underwriting profitability top of mind and less interest in equity returns.

Those were among the executive’s comments in a wide-ranging interview with The Insurer TV on the sidelines of last month’s InsurTechNY Spring Conference, where he outlined the firm’s insurtech proposition and detailed current capacity conditions for start-ups.

Aronchick oversees Guy Carpenter’s insurtech center of excellence, which he described as a practice group for earlier-stage, digitally-enabled companies.

The practice group serves to educate all of the firm’s North American companies – including longstanding global stock and mutual company clients – on advancements in insurance technology on a quarterly basis.

Meeting insurtech clients “where they are”

The bulk of the practice group’s work is focused on “execution” for clients defining themselves as insurtechs, or early-stage, digitally-enabled underwriters including carriers and MGAs.

“Our role is to meet them where they are, in whatever lifecycle moment they might have, from pre-revenue to IPO and everything in between, and also deliver the totality of services that Marsh McLennan more broadly, can deliver to our clients,” Aronchick explained.

The Guy Carpenter executive said his firm handles “the basics” of finding paper and reinsurance for clients, but also offers significant help with analytics, and collaborates with sister company Oliver Wyman to bring actuarial resources beyond what Guy Carpenter can provide.

Marsh also helps insurtechs secure their own insurance, for things like D&O and E&O coverage, while sister consulting company Mercer provides human benefit solutions.

“And we bring all of that together through the lens of the insurtech [center of excellence],” he explained.

Market conditions “tough” regardless of insurtech label

Aronchick described current market conditions as “tough” regardless of whether a firm considers itself an insurtech or not.

“I think reinsurers are working in a very quantifiable environment these days and they're looking across the board,” he said.

“And when you're dealing with NewCos, or early-stage entities, or someone maybe that's made some adjustments to their portfolio, or has just started, you either have an absence of data, or you have data that is in the process of being refined to tell a new story,” Aronchick explained.

He said that means “the bar is higher” to get reinsurers to deploy capacity and that brokers “have to work harder to achieve that same capacity”.

Guy Carpenter has 30 clients across its North America portfolio that describe themselves as insurtechs, and Aronchick said the broker has been successful in getting deals for those clients done.

“Those deals are getting done if the clients have clearly quantifiable stories, they can clearly demonstrate that they're adding value and I think that's the broader theme,” Aronchick explained.

Reinsurers taking a more “sober” approach to insurtechs

He said that reinsurers in recent years have moved away from the “total return model” of pairing equity investments with reinsurance.

“I think today, as the market’s matured, and a lot of the early class of insurtechs that came through in 2017 [or] 2016 have made their way to be fully mature businesses, global reinsurers grade [insurtechs] as they are, and we're seeing increasing diversification as they come through, and they make different plays,” he commented.

“Folks are looking at the transactions, I think pretty soberly from an underwriting perspective. And if you're a new or de novo player that shows up onto the scene, I think broadly speaking, reinsurers are going to give you 24-36 months to make an underwriting return or prove that you're on that path,” he said.

Aronchick added that Guy Carpenter is “pretty careful” about taking on clients it doesn’t think can meet that objective.

Capital reserves have been critical to survival

The insurtech segment – along with the technology sector more broadly – has attracted significant attention the last two years as higher interest rates have pressured valuations and start-ups’ ability to raise capital.

Aronchick said that the insurtech firms that are succeeding in the current environment are those that have maintained large capital reserves.

“And that mattered, because over the last 24 months, while incremental capital wasn't there and [firms] weren't yet cash flow positive – which, by the way, many of them are approaching that stage – they were able to continuously invest in their business with confidence,” Aronchick commented.

Guy Carpenter’s North America insurtech head said that while insurtechs “certainly had to make sure” they generate positive loss and expense ratio unit economics, those without cash reserves have struggled to prove they could both shrink their loss ratio and grow at the same time.

“I think we're seeing a lot of those companies that had the biggest, most robust businesses go through a bit of a tough period where they had more restricted access to capital in both the equity and the risk markets,” he explained.

“That seems to be clearing up quite a bit. And the folks that are maybe struggling a little bit more are the folks that couldn't kind of do that balancing act of both growing and managing the unit economics,” he continued.

“Those that fall into that category, though, there's a lot of really quality businesses there and I think we're seeing more in the way of strategic partnerships with established players that look at them and [see] a great company could use the benefit of a bigger balance sheet behind them.”

Watch the full interview with Guy Carpenter’s Max Aronchick to hear more on: