Even though the global reinsurance segment remains well capitalised, market players are being cautious with the deployment of resources, according to AM Best analysts.
One of the key drivers for capital growth was the increase in investment values during 2021, mainly in equities. Yet for the year-end 2022 the rating agency expects a decline in overall available capital, a conclusion based on how the investment markets have reacted so far to the interest rate hikes, as well as fears of sustained inflation and a potential recession.
Analysts noted that, since a significant proportion of this decline is explained by unrealized investment losses on fixed-income instruments, a careful assessment of a company’s liquidity needs and its ability to hold assets to maturity is crucial as part of their balance sheet strength assessment.
AM Best highlighted that, although the reinsurance segment remains well capitalised, it is important to make a distinction between “available” and “dedicated” or “deployed” capital – “available” does not translate automatically into “dedicated”.
The rating agency said: “That available capital has been plentiful—over the last five years less than 85% was needed to support a BCAR (Best’s Capital Adequacy Ratio) assessment of “Strongest”—has fortunately not translated into a lack of underwriting discipline.
“Reinsurers remain focused on stabilising results and consistently working to meet their cost of capital—which still constitutes a mixed bag. Given the current market uncertainty, most players feel the need to keep a material amount of dry powder to protect their balance sheets against market fluctuations and to deploy resources prudently when the right opportunities arise.”
Unlike previous hardening cycles, analysts have observed that new capital has not had a material impact on market conditions, investors are remaining extremely cautious. They noted that, after early signs of enthusiasm and the emergence of a few start-ups since 2019, execution has been slow and inconsistent.
Regulatory and recruitment delays have played a role, also some business plans have been downsized or changed suddenly based on opportunistic deals rather than on solid strategies and several projects are yet to be seen.
Additionally, third-party capital seems also subject to the same level of scepticism when it usually is expected to react more swiftly to market conditions.
Despite higher demand and improved pricing, the volatility of recent claims remains the key issue, and issues with regard to trapped capital have not gone away completely, analysts added.
The future of the segment id hard to predict, according to AM Best, as how the year-end renewals go will depend heavily on actual claims activity and on where the global economy goes.
The rating agency added: “Given the elevated catastrophe activity experienced this year, asset market volatility, continued geo-political angst, inflationary pressures and recession fears, uncertainty could remain so high that few investors will feel comfortable deploying capital regardless of the price. A few new entrants will still try, but their impact is likely to be limited in a market in which rates could continue to rise in response to more limited dedicated capacity.”
It also believes that, with expanding digitalization and worrying climate trends, the importance of property cat risks and cyber is likely to continue to grow even further.
Yet, robust modelling, adequate pricing, and strong risk management tools for both risk categories remain a clear challenge, as they are key for re/insurers to feel comfortable with their pricing and risk selection.
AM Best concluded: “Long term, however, if the reinsurance segment does not develop more innovative solutions, its role and its relevance to the broader economy may be dramatically diminished.”