Major reinsurance companies are increasingly going as direct as they can to source growth in gross written premiums from as close to the customer as they can, with Munich Re’s $250 million investment in insurtech Next Insurance the latest example.
Munich Re has announced today that it invested $250 million in the insurtech Next Insurance at a valuation of just above $1 billion, giving the reinsurance giant a roughly 27.5% stake in the start-up, technology driven insurance carrier.
Munich Re had already invested in Next Insurance twice before, in the start-ups 2017 and 2018 Series A and B funding rounds.
But this technically Series C investment round only featured Munich Re and the reinsurance firm has acquired shares from other earlier stage investors to consolidate its position as a lead backer for Next.
We often talk about insurance-linked securities (ILS) funds and investors penchant for getting as close to the source of risk, and the customer, as possible, but it is the major reinsurers that perhaps provide the most clear examples of strategic moves to secure risk in bulk as directly as possible and outside of the typical renewal cycle.
Next Insurance targets small to medium enterprises in the United States, an area of the commercial insurance market where Munich Re is not as active as the larger, corporate and facultative sized risks.
Explaining the reinsurers reasoning, CEO and Chairman of the Board of Munich Re Joachim Wenning explained, “Next’s data- and technology-driven business model offers outstanding growth opportunities, which we will harness together. Next Insurance will benefit from our expertise in primary insurance and reinsurance. This investment emphasises Munich Re’s commitment to be the leading provider of digital insurance solutions.”
Munich Re has been working with Next Insurance since its launch, both as a strategic advisor and investor and also as the 100% reinsurer of much of the risk the insurtech underwrites.
From launch, Next wrote all of its business using the services of Markel owned program and fronting specialist State National, which did not assume any of the risk and instead it was all passed on through a 100% reinsurance agreement with Munich Re.
Relationships like this provide major reinsurers like Munich Re with a source of gross written premiums from the front of the market chain, which in areas of the market where its own underwriting operations are not as prevalent makes for a very attractive source of risk from outside of the renewal cycle.
Munich Re notes that with the U.S. insurance market for small and medium enterprises (SME’s) having a premium volume of around $139 billion, it’s a “very appealing” target for the reinsurer.
Wenning highlighted this, noting that the investment in Next helps Munich Re to, “Expand its footprint in the promising insurance market for small and medium-sized commercial customers in the United States. We are confident that building on our proven collaboration will benefit both Munich Re and Next Insurance.”
It’s all about potential of course, as Next Insurance is still scaling up currently having reported a premium run rate of $44 million for 2018.
For Munich Re that would be small, but given the size of this new investment the reinsurance firm clearly believes that the run rate is going to increase significantly over the next few years and that it’s worth taking a major stake in Next so as to benefit from this as the reinsurer of choice.
Relationships like this see the major reinsurer acting as ultimate backer of the risk, while Next earns its income in an MGA style to begin, although it has now licensed itself as a full insurance carrier across the U.S. so is likely beginning to retain a little more of the risk itself.
However we understand its still largely fully-reinsured, with Munich Re as the backer of record currently and the reinsurer therefore benefits from this source of risk that it does not have to bid for during the renewals and instead flows to it on a regular, all year around basis.
Hence, this is likely higher-margin risk for Munich Re than it may see from other sources, with the added benefit of flowing to it across the year instead of just at renewal junctures.
Through these kinds of investments and long-term relationships, Munich Re becomes more than a reinsurer, as partner, strategic investor and capital provider of record in lending its balance-sheet depth to Next.
It’s a far more efficient model for a high-growth insurtech start-up, to know that you have the reinsurance capacity required to sustain accelerated growth, without the need to go to market during competitive renewal cycles and with the certainty that one of the largest partners in the industry has your back.
For the reinsurer it’s all about backing the right start-ups that are going to achieve the scale necessary to pay-back your investment and provide a sizeable and incremental boost of higher-margin risk premiums to your GWP.
Commenting on the investment, Guy Goldstein, Co-Founder and CEO of Next Insurance said, “We have been working with Munich Re since the beginning, and they have been a great partner in helping us grow and develop our business. We launched Next Insurance in order to transform the small business insurance industry and this new investment will continue to help us grow our team, develop our technology, deliver phenomenal service and accelerate customer growth. We are excited about the future of insurance and are proud to be, together with Munich Re, drivers of industry change.”