Global Reinsurers Appear Set for Return to Underwriting Profits

Having realigned their risk profiles, global reinsurers are in a strong position to generate the underwriting profits that have eluded them for a number of years, according to a new report from A.M. Best.

Despite high claims activity reinsurers are facing, Best said it expects them to produce underwriting profits.

In a Best's Market Segment Report, Global Reinsurers Face Challenges Even as Conditions Improve, the rating agency suggested that current market dynamics should be sufficient to pressure reinsurers into maintaining underwriting discipline. But, Best said, while the current reinsurance market appears to be one of the hardest in decades, the present cycle is very different from previous ones.

"Price discovery has taken longer than expected," the Best report said. "Claims patterns, as well as inflation and interest rate trends, have caught everyone by surprise. Optimism stemming from steep price increases and tighter terms and conditions is counterbalanced by an uncertain environment due to underwriting, economic, and geopolitical factors."

While reinsurers have taken a variety of steps that have improved their performance, they're still catching up following a challenging period, the Best report suggested.

After several years of disappointing results, reinsurers also face renewed pressure to meet their cost of capital, Best said. While 2021 marked the beginning of a recovery for reinsurers, claims activity remained elevated in 2022. Coupled with concerns about inflation, that prompted some key reinsurers to take actions to strengthen reserves.

In addition, "Investment results were severely affected by unrealized losses on fixed-income securities, the direct result of rising interest rates that started at the beginning of 2022," the report said.

The Best report noted that January 2023 reinsurance renewals saw a mismatch between supply and demand, with a sizable amount of reinsurance demand going unsatisfied. Despite that mismatch, there was not a meaningful influx of new start-up capital into the market, Best said.

Though their balance sheets might be reduced, the capital positions of global reinsurers remain strong, according to Best.

"Recognizing the difference between 'available' and 'deployed' capacity is critical," Best said. "'Available' capital is not under pressure—the largest, well-established global reinsurers either still hold plenty of 'dry powder' or are very well positioned to raise capital without much difficulty. However, these well capitalized players have become much more selective allocating their capital, which pressures the deployment of capacity."

The Best report said that incumbent reinsurers with proven track records are best positioned to raise capital if necessary. Meanwhile, potential start-ups face investor skepticism, given the segment's volatile results in recent years. In the current climate, industry consolidation is more likely than the emergence of a reinsurance "Class of 2023/24," the rating agency suggested.

The Best report noted that past hard market cycles were typically triggered by a major catastrophe that significantly eroded available capital, as with Hurricane Andrew in 1992, the 2001 terrorist attacks, and Hurricanes Katrina, Rita, and Wilma in 2005. Those catastrophe events led to the emergence of new "classes" of reinsurers.

The current reinsurance market began to harden after the large losses of 2017, including Hurricanes Harvey, Irma, and Maria, Best said. But, unlike previous hard market cycles, the years since then have continued to see sustained claims activity, often not the result of isolated catastrophic events but instead an accumulation of "secondary perils," with the impact exacerbated by the COVID-19 pandemic, a heightened risk environment, inflation, and the Russia-Ukraine conflict, the report said.

Unlike previous cycles, the current reinsurance market didn't see a sudden spike in rates but instead a longer path than in past markets to achieving price adequacy, though whether the market has achieved that adequacy remains in doubt, Best said. The market also saw a shift among many reinsurers to noncatastrophe risks.

"Following the much harder market conditions since the start of 2023, there is renewed interest in property catastrophe risks, but with much tighter terms and conditions,” the report said.

January renewals saw reinsurers being more decisive about expected profit margins compensating for the amount of risk they were taking on their balance sheets, Best said.

"Although operating performance is improving, concerns about both economic and social inflation, central banks' contractionary monetary policies, asset market volatility, and the recent underperformance of the global reinsurance segment have been translated into a higher cost of capital," the Best report said. "Several companies are targeting return on equity metrics of around 15 percent, or even higher. After several years, despite the improvements, the segment is still catching up."

Best's report noted that the reinsurance segment plays a significant role in ensuring effective capital management by protecting ceding companies' balance sheets from claims volatility.

"From a market perspective, this is much more efficient than simply smoothing—or even propping up—technical results to benefit primary writers who may have become overdependent on reinsurance," the report said. "Volatility at the right price is at the core of reinsurance, but volatility implies a combination of bad and good years, not simply heightened loss frequency."

The report said Best welcomes reinsurers' cautious approach to allocating capital.

Ultimately, its stable outlook for the global reinsurance market reflects a "balancing act" between the positive and negative factors facing the global reinsurance segment, the Best report said.

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