Rating agency AM Best has announced it is maintaining its stable outlook on the global reinsurance segment, despite market conditions being highly uncertain.
AM Best analysts noted that despite most drivers not being seen as stable in isolation, overall a number of positive factors are counterbalanced by negative ones.
According to the rating agency, the main negative driver is the heightened natural catastrophe activity that continues to test investors’ risk tolerance levels. This is being compounded by geo-political and economic uncertainty, in addition to growing claims costs.
Additionally, despite improving pricing trends and tighter terms and conditions, new traditional capital is cautious and remains on the sidelines. Similar constraints are being seen on the insurance-linked securities side of the market, particularly for retrocession capacity. This is seen by AM Best as another negative driver.
“While the segment remains well-capitalized, ongoing interest rate hikes and volatile investment markets have materially reduced shareholders’ equity on a market value basis,” said Carlos Wong-Fupuy, senior director, AM Best.
Other negative drivers include inflationary pressures and the risk of recession, which make profitability targets more challenging over the long term.
According to analysts, these negative factors offset a number of positive ones, which include an upward pricing momentum and enhanced market discipline, including tighter terms and conditions. A continued growing demand for reinsurance capacity, as primary insurance carriers seek out stable results and capital efficiency in an uncertain market environment.
Additionally, some major players are starting to stabilize their results by reducing property cat exposures or benefitting from a diversified business mix, including significant life books in the case of the largest reinsurers, the rating agency noted.
AM Best said: “Early expectations of reinsurance rate increases started to attract new capital in 2019, in the hopes that natural catastrophe activity would subside and return to average historical levels.
“That hope has been negated by the devastating Hurricane Ian, estimated to be one of the costliest insured events in recent history. But even without major catastrophic events, the accumulation of small to medium-sized events has had a material impact on claims ratios, sometimes at unexpected times of the year.”
The growth of secondary perils, the pandemic, and the Ukraine-Russia conflict have added to the negative pressures on reinsurers’ results over the last few years, which have mainly been driven by traditional natural catastrophe events.
This, according to the rating agency, has been compounded by financial, economic, social, and geo-political uncertainty in general.
“Although the segment remains well capitalized, the instability of financial results and inability of most players to meet their cost of capital has tested investors’ risk tolerance,” said AM Best .
