In a recent assessment of the global reinsurance industry, AM Best analysts have indicated that despite favourable market conditions, a new class of global reinsurers is unlikely to emerge in 2023.
The analysis points to several factors that contribute to this projection. While the market has experienced historically high insurance rates, dwindling capital buffers, and primary insurers expressing dissatisfaction with imposed risk retention levels, AM Best’s experts assert that these circumstances are not conducive to the birth of a new wave of reinsurers.
The report emphasises that the upsurge in rates can be attributed to persistent technical underperformance rather than a sudden scarcity of available capital.
The decline in shareholders’ equity, although significant, is deemed manageable as long as prudent asset liability management and liquidity measures remain in place.
This outlook is generally applicable across the sector, indicating a broad resilience to the current economic challenges.
AM Best’s analysis suggests that the ability of primary insurers to maintain healthy profit margins, while reinsurers struggled, was previously linked to the availability of low-cost reinsurance.
The trend had been sustained by risk retention levels that remained surprisingly low despite claims inflation and rising frequency. Gradually, reinsurers found themselves exposed to layers of risk beyond their initial intentions, owing to a period of prolonged low interest rates and pressure to deploy excess capital.
Reinsurers have, in response, been redirecting their capital away from property catastrophe risks. This has taken the form of either moving up the protection hierarchy and imposing stricter terms or diversifying into more stable and lucrative lines such as casualty or specialty insurance.
This shift from reinsurance to primary business has been an ongoing trend, amplified after significant losses in 2011-2012.
AM Best’s data reveals that for the most influential global reinsurance groups, the reinsurance share of gross premiums written has decreased from 75% to 62% between 2018 and 2022, further underscoring this transition.
The report underscores that a diversified business model proves to be the most effective strategy for managing market cycles and optimising profit margins.
While substantial rate increases in January 2023 have persisted, the pace has moderated. Whether insurers vocal about reducing property catastrophe exposures will follow through remains to be seen. Even in the event of an expansion in such exposures, stringent terms and conditions are expected to remain integral to the landscape.
Capitalisation levels are reported to be robust, although investor fatigue in both traditional and insurance-linked securities (ILS) markets is evident.
The analysis suggests that while ILS funds have not been significantly impacted by higher interest rates due to their short-term and floating-rate securities, overall volumes have stagnated since 2018.
AM Best predicts limited additions to net alternative capacity in the short term, even with improved pricing terms.
Amid these challenging conditions, the prospect of a new Class of 2023 reinsurers entering the scene is subdued. Investors are likely to demand strong underwriting discipline and adaptability to changing business cycle conditions. Established and diversified companies with proven track records are expected to fare better in this environment compared to startups under pressure to meet top-line targets.
