In response to the recent surge in interest rates, the global reinsurance market has experienced a mixed landscape, according to a report by AM Best.
The rise in interest rates has triggered concerns about unrealised investment losses, but reinsurers have demonstrated resilience in managing these challenges.
Property/casualty reinsurers, in particular, have retained adequate liquidity, enabling them to recover much of their losses as fixed-income investments matured.
While mark-to-market losses were not substantial enough to prompt a strategic shift in business, many reinsurers are optimistic about recouping these losses in the near future, given the average portfolio duration of three to five years.
One notable trend is the strategic shift in reinvestment strategies, with insurers reallocating funds to new, higher-yielding issuances.
These new investments often offer double or triple the yields of their predecessors, contributing to improved overall operating returns through higher net investment income.
However, the report also highlights challenges, especially for global life reinsurers with long-duration liabilities. These reinsurers reported more significant unrealised losses, as their long-duration assets proved more sensitive to changes in interest rates.
The prolonged reinvestment period for these assets into higher-yielding securities poses a challenge, requiring careful management to avoid substantial realised losses due to large unrealised loss positions.
Despite challenges, life reinsurers have experienced rising investment yields over the past year, thanks to the overall upward trend in interest rates.
In the U.S. life segment, reinsurers have responded by reducing credit risk in their portfolios, favouring NAIC-1 bonds as the corporate bond market becomes more attractive with higher rates.
On the other hand, Bermuda- and Cayman Island-based reinsurers have shown a willingness to take on additional investment risk through private credit and other structured securities, often sourced from parent companies specialising in these types of investments.
AM Best emphasises the importance of monitoring the higher level of investment risk among offshore-domiciled life reinsurers.
The market has witnessed varied responses to the challenges posed by the rise in interest rates, with established franchises successfully raising capital to support new business, while others face difficulties.
As the industry navigates these complexities, AM Best will continue to monitor developments and assess the evolving landscape of global reinsurance, the report noted.
