Global Reinsurers Achieve Cost of Capital in 2023 after 4-Year Gap

Reinsurers surpassed the cost of capital in 2023 for the first time in 4 years, driven by favorable underwriting results due to repricing and portfolio derisking, according to a new report from AM Best. 

The Best's Market Segment Report, titled "Reinsurers Meet Cost of Capital for First Time in Four Years," is part of AM Best's annual review of the global reinsurance industry. 

The report reveals that the reinsurance industry's median weighted average cost of capital increased to 8.12 percent in 2023, marking the first instance since 2019 that the industry met this crucial financial benchmark. In comparison, the median cost of capital was 7.35 percent in 2022 and peaked at 9.31 percent in 2021 during the 2011–2021 period. Concurrently, the industry's return on equity reached its highest point in 12 years in 2023. 

"The hardened market has led to more sustainable pricing momentum, enhancing reinsurers' ability to meet their cost of capital over the medium term," said Sridhar Manyem, senior director of industry research and analytics at AM Best. 

Reinsurers are increasingly focused on optimizing their cost of capital and maximizing returns while managing risks aligned with their risk appetites. Inefficiencies in risk management can lead to unexpected volatility in returns, subsequently increasing the cost of capital. The prolonged low interest rate environment saw growing investor interest in reinsurance through traditional equity, third-party capital, and insurance-linked securities as a means to diversify portfolios. 

"Reinsurers' failure to meet their cost of capital consistently in recent years has tested investors' risk appetite," said Helen Andersen, industry analyst at AM Best. 

A video discussion of the report can also be accessed on AM Best's website. 

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