“The January 2023 renewals highlighted the mismatch between supply and demand, but it’s also important to recognize the difference between ‘available’ and ‘deployed’ capacity. Available capital is not under pressure; however, the well-established global reinsurers have become much more cautious allocating their capital, which pressures the deployment of capacity,” suggests Carlos Wong-Fupuy, senior director at AM Best.
As per a new report from the rating agency, despite operating in “extremely challenging conditions” in 2022, the global reinsurance segment still returned an underwriting profit.
According to AM Best, unlike previous cycles, the price discovery path has taken longer than expected, as the last six years have seen a “slow, protracted process of reinsurers realigning their risk profiles, reallocating capital, re-underwriting and repricing.”
The firm said that in the past few years, there has been a shift toward non-catastrophe risks, especially for carriers heavily affected by losses in previous years.
“With much-harder market conditions since the start of 2023, interest in property catastrophe risks has renewed cautiously,” the rating agency added.
According to the firm, reinsurers’ profitability began seeing improvement in 2021, “reflecting key players’ shift from the lower and medium layers of property catastrophe risks; tightened contract wording; and the re-deployment of capital toward the casualty, specialty lines and excess and surplus primary segments.”
In 2022, AM Best’s global reinsurance composite posted a combined ratio of 95.6, a 0.8-percentage-point improvement over 2021. At the same time, investment results were affected severely by unrealized losses on fixed-income securities.
Meanwhile, the global reinsurance segment posted a return on equity of 0.8% in 2022, following a 9.0% ROE in the previous year.
“Concerns about economic and social inflation, central banks’ contractionary monetary policies, asset market volatility, and the recent underperformance of the global reinsurance segment have translated into a higher cost of capital as well,” AM Best explained.
The rating agency noted that despite the severe decline in shareholders’ equity, global reinsurers “remain well capitalized.”
AM Best’s report continued, “Given reinsurers’ prudent approach to deploying capital, they are likely to preserve underwriting discipline for a longer period than in previous cycles.
“However, market participants are under pressure to innovate, expand their presence and assert their role in an evolving economy in which today’s emerging risks will soon become the dominant ones.
“AM Best’s stable outlook on the global reinsurance segment reflects this balancing act between positive and negative factors.”
Wong-Fupuy concluded, “Investors will likely demand a strong commitment to underwriting discipline, as well as flexibility to adjust to changing conditions in the business cycle.
“Well-established, diversified companies with a proven track record are better positioned to succeed in this effort than startups that are pressured to meet top-line targets.”
