“We don’t see a shortage of capacity, what happens is that the way that capacity has been deployed has become much more cautious,” AM Best’s Carlos Wong-Fupuy commented at the annual Rendez-Vous de Septembre (RVS) event in Monaco.
The re/insurance sector remains very well capitalised despite some reductions in the capital base, but inflationary pressures are still present, yet it is a promising environment, the Head of Analytics explains.
This cycle, compared to previous ones, is different, Wong-Fupuy highlights: “In previous cycles we have seen a significant event which has depleted a significant amount of capital, this has put pressure on rates. This can also happen in a very short period of time, and we saw this new influence of capital, but this time is actually very different.
“We have seen this cycle, probably starting in 2017 with Harvey and Maria. Depletion of capital, we actually didn’t see that. The increasing rates have been a process, which just has taken much longer than expected, and we haven’t seen that influx of new capital.”
He continues: “In 1992 with Hurricane Andrew, then 2001 with the 9/11 attacks and 2005, there were [hurricanes] Katrina, Rita, Wilma. So we saw this hardening of the market and this flood of new capital. But this was as well at a time where market conditions were very limited.
“And in 2011, we didn’t see that movement. Partly, it was because the market was worshipping capital. We had relatively recently the financial crisis 2008, the expansionary monetary policies, low interest rates. And that was the same time period over which ILS started to expand.”
There were small movements in prices in 2011, which according to Wong-Fupuy, were very geographically concentrated. Now the situation has changed.
“At the same time concerns about interest rates have only started to materialise in the last year, and all these concerns about the inflation as well have emerged relatively recently,” he notes.
The market has been growing consistently until 2021, with a decline in 2022 due to the unrealised investment losses of fixed income portfolios.
Fron 2017, AM Best started to calculate excess capital, which has been buffer material since 2021, and although it shrunk significantly in 2022, companies still remain well capitalised, Wong-Fupuy note.
“What we see is reinsurance maintaining very robust financial strengths. We have seen those unrealised investment losses from fixed income portfolios, but all these indicators of liquidity are still very strong,” he adds.
Wong-Fupuy concluded: “In general, what we see going forward is good underwriting discipline. What we see is that companies which are already well positioned in the market will be able to expand and really deploy that capital, whereas for brand new startups, the environment is still challenging.”
