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A new report has said that reinsurers are focusing more on providing capital protection than stabilising their earnings, partly due to the changes in the market from the inflation event and high-interest rate market over the last few years – and the knock-on effect to investments is being felt.
The report, from rating agency AM Best, said that reinsurers have taken corrective measures after several years of sub-par underwriting underperformance, but that current claims activity is being driven more by elevated medium-sized events and secondary perils than by single large-scale events.
“The main driver for the change has been the refocus on technical profitability experience over the last few years.”
It added that hard pricing conditions are expected to last longer than in past cycles.
However, with all of these conditions swirling in the market, the effect on reinsurers’ investment portfolios could become even more pronounced.
The report said there would be a market reset by global reinsurers designed to de-risk their portfolios, realign relationships with primary carriers, and improve their pricing generated strong technical results for the segment in 2023.
“The main driver for the change has been the refocus on technical profitability experience over the last few years,” said the report. “Unlike previous boom and bust cycles, there are a number of factors – climate trends, an increasingly complex risk environment, and a prolonged period of higher interest rates – that makes us believe these improved underwriting margins are likely to last for at least another couple of years.”
"New company formations have not materialised, particularly in the property catastrophe space.”
The report said that capitalisation of reinsurers remained robust even with the hard market. “The segment remains well capitalised and, although companies have implemented measures to manage their capital more efficiently, their solvency positions have not been under meaningful pressure, other than the temporary reduction in capital and surplus as a result of unrealised investment losses on fixed-income instrument triggered by the increase in interest rates in the second half of 2022.”
The report also looked at what the hard cycle meant for players when compared to how it affected new entrants to the market. “New company formations have not materialised, particularly in the property catastrophe space,” said Carlos Wong-Fupuy, senior director, AM Best. This, it emphasised, was largely due to capital flows in the market and could mean less money coming into the market in the medium-term.
"Higher interest rates have contributed to this, given the availability of investment alternatives much more attractive on a risk-adjusted basis.”
“Capital has become more nimble and opportunistic,” it said, saying that the previous soft market was deterring external investors from joining it. “[Capital now is] focused either on already well-established and successful balance sheets with a proven track record or on short-term insurance-linked securities (ILS) vehicles. Higher interest rates have contributed to this behaviour, given the availability of investment alternatives much more attractive on a risk-adjusted basis than in the past.”
However, AM Best, specified that dedicated capital hasn't simply not entered the market – merely the holders of said capital were being much pickier.
This lack of new entrants has also helped continue underwriting discipline to remain key. “Historical underperformance, a riskier environment that is more difficult to model and price and, most importantly, a new phase of more elevated interest rates, all contribute to a higher risk premium for potential investors looking to fund new ventures.”
Earlier this year a bumper year for ILS was predicted, by Gallagher Re, in a report on the industry. This came ahead of a likely active Atlantic Hurricane season, which, so far, has already seen several storms including Hurricane Debby.
Gallagher Re said that 2024 would “be another record-breaking year of cat bond issuance, with issuance up roughly 41% year-over-year through May 31, 2024”.
They added that risk spreads have widened since February 2024, primarily due to a “robust pipeline” and, to a lesser extent, “forecasts for an active hurricane season as well as a catastrophe model changes”. In its report, Gallagher Re said that “risk spreads remain significantly below where they were one year ago”.
