Reinsurance: A Long-Term View and the Right Team Can Reach the Unreachable Star

My perspective on specialty carriers is in direct contrast to those who write of doom and gloom because heavily reinsured carriers “run where the brave dare not go.” “The Impossible Dream,” composed by Mitch Leigh, lyrics by Joe Darion, provides a rationale for why heavily reinsured carriers, many reviewed and rated by Demotech Inc., are emerging as the solutions to the availability of property and casualty (P&C) insurance in catastrophe-prone jurisdictions.

To set the stage, here are my observations on why larger carriers, particularly publicly traded insurers, withdraw from, or limit writings in, certain jurisdictions. They have concluded that the opportunity to secure profitable operations in that jurisdiction is disproportionate to the incremental effort that must be expended to attempt to do so. They may have concluded this because there is a need for tort reform, and reinsurance costs allocable to that jurisdiction are disproportionate to their countrywide costs (hence, pup companies). They can deploy existing resources to jurisdictions that are more likely to be profitable, as the more obvious reasons. In sum, the volatility is such that their investment of talent, time, and resources, whether short-term or long-term, will have a more favorable return in other markets. They will not want to invest in the possibility of financial distractions when ongoing operations in other markets are likely to be rewarded. This is a reasonable response. I respect it.

However, in contrast to seeking stability of existing national operations, heavily reinsured insurers with experienced management teams focus on resolving jurisdictional dysfunction “to right the unrightable wrong” and “to reach the unreachable star.” They are “willing to march, march into Hell for that Heavenly cause.” How are they able to undertake “this glorious quest?”

First, they study and dissect the challenge(s) that caused other carriers to avoid the jurisdiction or line of insurance, or limit writings. It may be difficult for an established carrier to sail against the wind when insurance publication headlines frame a market as dysfunctional. The deep expertise and experience of insurance professionals reviewing distressed jurisdictions will encompass legal, regulatory, underwriting, claims, actuarial and data science expertise accessing the non-public information they have accumulated over their careers to supplement public information.

Second, to perform the analysis discussed above, they identified and secured a team knowledgeable on the challenges unique to the distressed area. The team was not dismissive of the market because the jurisdiction was unlike other jurisdictions. Rather, the focus is “how can we manage the challenges in this market and capitalize on the dysfunction rather than run from the dysfunction?” They need not seek uniformity of operations from state to state or line to line. They adapt and adjust operations in response to the characteristics that make the jurisdiction unique.

Third, these carriers can and will “fight for the right without question or pause,” “no matter how hopeless” and can do so because their timeframes are long, not short. Longer term timeframes provide management with the opportunity to refine the initial business model as experience emerges. These regional specialty carriers focus on learning from “dysfunction,” incidents, not running from “dysfunction.”
Fourth, they recognize that being a low-cost provider is not part of their business model. Making insurance available is their goal. In markets that have a degree of dysfunction, operating costs of the regional specialists will be higher, as they have the operating expense level associated with operating in a functional jurisdiction plus the expense of the incremental effort needed to address the dysfunction. A substantial component of this expense is the reinsurance program to complement management’s business model.

Nearly all carriers stepping up in catastrophe-prone areas are privately held, so the need for stability and growth of profits on a quarterly basis does not dictate operations or business model. Yet, if profitability is likely to be elusive and volatile, why do sophisticated investors contribute capital to regional specialty carriers? It is my opinion that investors see and respect the intellectual expertise that developed a strategy for mitigating the dysfunction that caused others to re-examine their commitment to a jurisdiction, or line of insurance. The founders of regional and specialty insurers convinced investors that the founders can “reach the unreachable star.”

In 1989, Demotech Inc. was the first to review and rate independent, regional and specialty insurers. We do so despite the oldest insurer rating agency advising Anita Champ, representing Fannie Mae Single Family, that it was impossible to rate those insurers. It is now 2025. Here is my prediction for the future: Those who disrespect regional and specialty insurers stepping up to write business in markets where larger carriers have retreated or those who disrespect Financial Stability Ratings® issued by Demotech Inc. will be buying insurance from regional and specialty carriers. “And the world will be better for this.”