Munich Re watching accumulations as Digital Partners continues investments

Despite pulling capacity from Hippo and Jetty, Munich Re remains committed to its Digital Partners platform amid a greater awareness of how quickly accumulations can mount across the broader group due to the rapid growth of some of its insurtech-focussed underwriting partnerships.

Digital Partners (DP) is Munich Re’s insurtech and fintech-focused platform that, among other offerings, provides capacity and venture capital financing to its partners.

In an interview with The Insurer, DP CEO Andy Rear (pictured above) said there has been a learning process about how quickly exposures can mount and the impact that can have on the wider group.

As Rear explained, insurtechs may start out with a clear vision, but if they “hit gold in one segment or another” they will scale up in that specific area.

That rapid growth can bring accumulation issues if, for example, a homeowners insurtech writes in catastrophe-exposed regions.

“The good thing about working for a group like Munich Re is that it gives you this huge balance sheet with which to experiment, but one of the things that comes with that is you also have to recognise that once you reach scale, what you do has an impact on the group as a whole,” said Rear.

In common with all carriers, Munich Re has a finite amount of exposure it is willing to take on for certain perils such as hurricanes, earthquakes and wildfires.

“When you get an accumulation scenario which is somewhere near the top of that limit then you have to start asking who gets the best dollar return for that unit of capacity,” he explained.

“[You] have to recognise that once you reach scale, what you do has an impact on the group as a whole.”

Andy Rear, CEO, Munich Re Digital Partners

“We can use that capacity in my business to support start-ups, or we can use that capacity in our traditional reinsurance relationships, or we can use it in the cat bond market, and so on.”

If an insurtech is going to take up some of that limit, another part of the broader company is going to have to give up business.

“All of these competing producers of accumulation have to work out where the value is,” said Rear.

“At some point it might reach a scale where you have to ask yourself from an underwriting point of view is it business we want and does it fit our global risk appetite? Do we have the right expertise to manage this?” said Rear.

And this has increasingly become a consideration for the DP platform.

DP recently ended reinsurance relationships with insurtechs Hippo and Jetty. While Rear would not go into specifics, there has been speculation that the growth of these platforms, and Hippo in particular, raised accumulation concerns in cat-exposed regions.

“We always knew that accumulation was going to be an issue for us, but we didn’t expect the platforms to grow quite so quickly, so we got hit with that accumulation issue,” Rear explained.

“The good thing about working for a group like Munich Re is that gives you this huge balance sheet with which to experiment, but one of the things that comes with that is you also have to recognise that once you reach scale, what you do has an impact on the group as a whole,” said Rear.

“It’s not the losses that are the problem, it’s the exposure,” he stated.

As Rear explained, much of DP’s interest is in insurtechs with books of $10mn to $20mn in size, so long as they do not carry very large limits and no large commercial exposures. To a degree, DP will watch and learn as the unit develops.

However, once an insurtech becomes $100mn or $200mn in size, Rear said DP may not always be the best underwriting partner.

Munich Re committed to Digital Partners

While DP has pulled its capacity from Hippo and Jetty, Rear said that the unit remains committed to its mission and vision of investing and providing capacity to what he called “world-leading” technology platforms.

DP currently has a busy pipeline with “eight to 10” underwriting deals in the offing at present, he said.

Not all of those will come off, but Rear was confident that DP will be entering into new underwriting partnerships in the coming months.

DP also continues to be on the hunt for new insurtechs to invest in, or put additional capital into. Recently, DP has made a further investment into and begun underwriting with digital title insurance offering Spruce, with the company also participating in a follow-on funding round for European pet insurer Bought By Many.

“We’re still very much actively looking for new partnerships and we’re looking at a couple of new investments at the moment,” Rear stated.

He cited these deals as evidence that DP remains committed to the insurtech space. There have been rumours in the market that parent Munich Re was considering disbanding the Digital Partners platform with losses and a lack of staff supporting the unit proving problematic to its success.

The decision to end the underwriting partnerships with Hippo and Jetty also raised questions.

But Rear insisted that DP remains committed to the sector.

“Our mission and vision haven’t changed since we started,” Rear said.

DP has “learned a lot about how we deliver it”, said Rear, especially with regards to the wider impact of its investments on the wider group, and notably when it comes to accumulations.

Partnering with other capacity providers

DP’s growth “has been continuous and astonishingly fast”, said Rear. The unit now has 25 underwriting partnerships – where it provides capacity for insurtechs to take on risks – and has invested in about half of those.

Rear was adamant that no potential underwriting partners have been put off teaming up with DP over the decisions to stop supporting Hippo and Jetty.

“That’s not something that we’ve experienced,” he said.

Rear added DP was still looking to underwrite insurtechs without support from other participants, although he acknowledged that for some units, and especially those where there is potential for rapid growth, it might make sense to partner with fellow insurers and reinsurers.

“One of the things we’ve learned over the past is just how quickly your exposure can grow,” said Rear.

“If we’re starting an experiment in a line of business that we know we don’t want a big exposure to in the long-term, then it’s probably best to be underwriting alongside another partner,” explained Rear.

“As these start-ups get bigger, it’s only natural that the risks will be shared in the market like for any large insurance company.”