In an increasingly crowded market, speciality insurance provides exposure to a different set of underlying risks, complementing investors’ alternative investment portfolios, argues Dan Adams (pictured), managing director, Arrow Global Insurance.

Over the past decade, the relationship between private credit and insurance has largely been understood through the lens of asset gathering. Insurance companies hold large pools of long-duration capital, and alternative asset managers have increasingly sought to manage those assets, acquire those liabilities or partner with insurers to access stable, permanent capital. That model has been highly successful. It has helped reshape parts of the alternatives industry, created stable fee streams and given private credit managers access to pools of capital that are often larger, more durable and longer-dated than traditional fund commitments. For many asset managers, the focus has been on insurance as a source of permanent capital, with private credit and insurance-related assets now representing over 50 per cent of assets under management across large alternative investment managers. The European managing general agent (MGA) market alone now exceeds €20bn (£17.1bn) of annual premium, highlighting the growing scale of specialist underwriting activity across the region, according to Howden Re.

However, this framing risks obscuring a different and, in my view, increasingly important opportunity. Insurance should not only be understood as a source of capital for private credit strategies. In certain specialist markets, insurance can be the investment strategy itself. That distinction matters. The first model is primarily about managing assets backing insurance liabilities. The second is about underwriting risk, structuring complexity and earning returns from specialist insurance markets where expertise, judgment and access can matter more than scale alone.

This second opportunity is particularly relevant for institutional investors looking for differentiated return streams within private markets. Many investors have increased allocations to private credit over the past decade, attracted by contractual income, downside protection and the ability to originate in less efficient markets. Speciality insurance offers a related but distinct opportunity set: one where returns are driven less by broad credit beta and more by underwriting skill, legal analysis, transaction structuring and disciplined risk selection.

The most interesting parts of this market are not life insurance, annuities, catastrophe risk or commoditised consumer insurance. Those are large and important sectors, but they are not where I see the clearest opportunity for institutional capital seeking underwriting-led returns. The more compelling area lies in specialist, non-catastrophe lines such as after-the-event insurance, contingent risk, tax insurance, warranty and indemnity insurance, surety and selected credit-related products. These are markets where risks are bespoke, outcomes are idiosyncratic and successful underwriting requires a level of expertise that cannot be easily automated or commoditised. While individual specialist lines may appear niche in isolation, collectively they form part of a substantial global speciality insurance market, benefiting from structural growth drivers, including rising transaction activity, increasingly complex regulatory environments, greater use of litigation finance, and growing demand for bespoke risk-transfer solutions in corporate and private capital markets.

A crucial point is that buyers in these markets are often purchasing insurance for reasons that go beyond a simple expected-value calculation. A corporate may use insurance to remove a legal uncertainty preventing a transaction from closing. A private equity sponsor may use it to achieve a cleaner exit, while a litigation funder or borrower may require it to manage risk, satisfy a lender or release trapped capital. In each case, the value of the insurance is not limited to the probability of a claim. It lies in the commercial outcome the policy enables: certainty, liquidity, execution or risk transfer.

That distinction is central to the economics of speciality insurance. In more commoditised markets, pricing tends to converge towards expected loss plus expenses and capital cost. In specialist markets, the buyer may be solving a broader commercial problem, which can allow disciplined underwriters to earn attractive margins where the underlying risk is well understood. The opportunity is not that these risks are risk-free; it is that they can be mispriced or underserved when the market lacks the expertise, capital or appetite to assess them properly.

The European opportunity

Europe is an especially interesting environment for this strategy because the market remains fragmented. European MGA premium has recently been growing at approximately 15 per cent annually, reflecting increasing demand for specialist underwriting capabilities, according to Howden Re. Specialist underwriting expertise is often found in small MGAs, local platforms or niche teams within larger insurers. Many of these businesses have strong technical capabilities and attractive track records, but they may lack the capital, infrastructure, regulatory support or distribution relationships required to scale. This resembles dynamics institutional investors have seen before in European private credit, real estate servicing and other operationally intensive markets, where fragmentation and complexity have created opportunities for platforms with local knowledge, capital and governance discipline.

From an investor’s perspective, fragmentation is a source of opportunity. We have seen this repeatedly across private credit, servicing and real assets. Markets characterised by local expertise, operational complexity and information asymmetry often offer more attractive economics than highly efficient, institutionally crowded sectors. Speciality insurance exhibits many of the same characteristics. The challenge is that these opportunities rarely appear in the form of large, scalable transactions. They are often small, specialist and operationally intensive. Capturing value therefore requires aggregation, infrastructure and a long-term perspective rather than simply deploying larger amounts of capital.

The role of MGAs is particularly important in this context. In speciality insurance, the most valuable asset is often not the balance sheet itself but the underwriting expertise that originates, assesses and prices risk. MGAs sit at the intersection of technical knowledge, market relationships and distribution, making them an important source of origination and underwriting capability. For investors, the attraction lies less in premium volume and more in the quality of underwriting judgment, the durability of origination channels and the alignment between specialist expertise and risk-bearing capital. Today, more than 650 MGAs operate across Europe, illustrating both the depth and fragmentation of the market, according to Howden Re.

Insurance as a strategy, not a source of capital

This is also where the comparison with traditional insurance-led private credit strategies becomes important. Many alternative asset managers use insurance to create or access large pools of assets to manage. The insurance company effectively becomes a source of permanent capital, while the manager earns fees by investing those assets into credit portfolios and other alternative strategies. There is nothing inherently wrong with that model. It has generated substantial growth across the industry and has proven highly effective for a number of leading firms.

The opportunity I am describing is fundamentally different. The objective is not simply to accumulate liabilities in order to invest the float. The objective is to own and control the underwriting economics of specialist risk, supported by appropriate capital, governance and investment management. Returns are generated through underwriting profitability, specialist origination and disciplined risk selection, with investment income acting as an additional contributor rather than the primary driver of value creation.

This distinction may appear subtle, but it has important implications for investors. In the traditional insurance asset-management model, scale is often the key determinant of economic success. In specialist insurance, expertise is the scarce resource. The value lies in understanding risks that others cannot analyse effectively, structuring solutions to complex problems and maintaining the discipline to participate only where the risk-adjusted economics are attractive.

It also changes how investors should think about capital. Insurance float remains policyholder money, not permanent equity capital. Solvency capital must be available to absorb unexpected losses, satisfy regulatory requirements and provide confidence to policyholders, brokers and counterparties. Premium reserves can enhance returns when invested prudently, but they do not replace the need for robust underwriting standards, strong governance and conservative balance-sheet management.

What this means for institutional investors

For institutional investors, the potential appeal lies in the combination of several return sources: underwriting profit, fee income from origination and servicing, and investment income on premiums held before claims are paid. More importantly, those returns are generated by a set of drivers that are often distinct from traditional fixed income and private credit exposures. The underlying disciplines will feel familiar to experienced credit investors, assessing downside risk, understanding legal documentation, evaluating recoveries and pricing complexity. However, the return profile is not simply another form of credit spread.

That does not mean speciality insurance should be viewed as a replacement for private credit. Rather, it may be better understood as a complementary strategy. Both disciplines rely on underwriting expertise, rigorous risk analysis and the ability to operate effectively in markets that are often fragmented and inefficient. However, speciality insurance introduces exposure to a different set of underlying risks, creating the potential for diversification within broader alternative investment portfolios.

In an environment where capital is abundant and many alternative strategies are increasingly crowded, genuine differentiation is difficult to find. Speciality insurance is not simple, and it is not without risk. Yet the very characteristics that make the sector more complex also help create its opportunity set. In these markets, expertise and judgement remain important determinants of success. Where complexity remains real and competition remains constrained, those attributes can continue to generate attractive returns. For institutional investors seeking differentiated sources of return that is an allocation worth serious consideration.