E&S barriers to entry will limit impact from start-up capital: Iglesias

New capital formation targeting hard market opportunities in the P&C industry will face significant barriers to entry in the E&S sector and will not have a meaningful impact on dynamics, according to Allied World president and CEO Lou Iglesias.

Speaking to The Insurer in the latest instalment of our The Best Policy podcast series, the executive questioned how much of an effect net new capital – taking into account existing capital that has been eroded or trapped – will have on the US market as a whole.

The estimated $10bn of net capital formation compares with surplus for the US market of $700bn.

“The $10bn comes in and I’m not sure how much of a real difference that’s going to make,” said Iglesias.

In the areas Fairfax Financial-owned Allied World operates, there are also significant barriers to entry, he suggested.

“To be in the E&S business in the US takes time and effort, not to mention you need to have relationships and a tremendous amount of operational capacity. You’re talking about churning thousands of submissions and issuing thousands of policies and handling thousands of claims,” Iglesias commented.

“When you hear the capital come in and say, ‘hey, we just want to go in the E&S business in the US because we think that’s good business’, well, okay. I don’t know there’ll be that much of an impact there,” he added.

The executive said a likelier route to access business would be through Bermuda in a reinsurance capacity, enabling start-ups to put capital to work faster.

Capital entering the reinsurance space will not have an impact on the underlying business either, he suggested, because the insurance business had been firming in the absence of a hardening reinsurance market .

“The reinsurance market is not the driver of the firming direct market that we have today. In fact, the reinsurance market is really just starting to move now to firm. So if you see new money coming into reinsurance, I don’t think it will be something that drives the market in the opposite direction, because it’s not the reason it’s moving to begin with,” said Iglesias.

Focus on core business

With significantly improved pricing conditions over the last 18 months, Allied World has focused its attention on opportunities in core lines of business.

“We think our best opportunity right now as a company is to continue to focus on what we are good at, which is bringing value to our customers and our brokers through the lines of business that we know well,” said the executive.

He added that the carrier would not spend time thinking about whether it should open in new geographies or launch a lot of new products.

“To me, right now, those would be distracting from a marketplace that really needs us. So, we’re going to focus on key lines of business including D&O, excess casualty and property,” Iglesias explained.

Reinsurance opportunity

The Allied World CEO said that the company is seeing attractive opportunities in its reinsurance business, which is led by John Bender and Kevin Marine.

The unit has been a strong advocate of cycle management, shrinking its book during the soft market in areas where it didn’t feel it was getting adequate rate.

But with the transitioning market, Allied World is now seeing pockets where there are opportunities to grow.

“We’re seeing more business in reinsurance and we’re more prone to come on more treaties right now, so we have been growing there and we think it’s the right time to look at doing that. It’s not the market that you see on the direct side, but it’s certainly a market where there are more opportunities than there were and we’re optimistic about it,” Iglesias said.

The executive described Allied World’s reinsurance operation as a “great diversifier” from its larger direct insurance business, with the two platforms running separately from each other.