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Ratings agency AM Best has revised its global reinsurance market outlook from 'stable' to 'positive'.
The company said that the supporting factors for this included that profit margins were “robust”, and the current margins followed a period of drastic repricing, higher attachment points, and tighter terms and conditions.
However, what positive rating means purely for investment operations is more unclear considering how they have been buffeted by global trends in recent years.
“In 2023, the global reinsurance segment generated positive underwriting results, with several reinsurers reporting combined ratios below 90."
AM Best said that alongside “strongly disciplined” underwriting, the segment was seeing improvements as it remained well capitalised with no new players expected to disrupt current market discipline. “Consolidation and flight to quality are more likely,” said AM Best’s report on the market.
Expectations of a slower reduction in interest rates than originally anticipated was likely to support stronger returns in the short term.
“In 2023, for a third year in a row, the global reinsurance segment generated positive underwriting results, with several reinsurers reporting combined ratios below 90.0,” said the analysis. “In 2022, similar results were heavily countered by unrealised investment losses in fixed income portfolios. These losses have been mostly recouped due to higher reinvestment rates. In 2023, most players produced excellent returns on equity, in several cases exceeding 20%.”
AM Best said that the end of a long period of “record-low” interest rates had “drastically changed the economic landscape, with heightened competition for resources between the reinsurance segment and other investment alternatives”.
“Despite the de-risking measures on reinsurance portfolios, it will take time for investors to reduce the risks premium they are currently applying to reinsurers."
They added that this was being exacerbated by the “past underperformance” of the segment and its perceived volatility, particularly given current climate trends and geopolitical instability.
“Despite the de-risking measures on reinsurance portfolios, it will take some time for investors to reduce the risks premium they are currently applying to reinsurers,” it said.
However, just last week the European Central Bank (ECB) and the Bank of Canada lowered interest rates for the first time in the current cycle.
The Bank of England (BoE) will meet next in August for its next Monetary Policy Committee where interest rate reductions will be top of mind. The UK has seen stagnant GDP growth in April at 0.4%, as well as lowering inflation and unemployment creep up.
In the US speculation remains about when the Federal Reserve will make a move on interest rates there.
Because of this there are “early signs of softening at the highest layers of the protection towers”, but AM Best said it believed that the “de-risking measures put in place over the last few years are unlikely to be loosened.”
Going forward AM Best said the current market hardening cycle was “different” to those that had come before in recent history. “The main trigger behind a return to market discipline this time has been sustained underperformance, compounded with abundant capital due to prolonged low interest rate environment rather than capital erosion,” said the report.
