In a segment report published Thursday, 30 November, AM Best maintained its stable outlook for the global reinsurance industry.
The credit rating agency pointed toward positive trends, including rate increases, especially in property insurance, with anticipated wider profit margins due to higher initial loss points. Additionally, there is a growing demand for insurance due to more frequent catastrophic events and economic uncertainty
However, the credit ratings agency noted that challenges persist, not least the unpredictable nature of weather-related losses and the changing risk landscapes. Despite better market conditions, there is also a cautious approach to new capital investment. Economic and social inflation concerns persist, along with increased post-pandemic mortality rates in certain regions.
Concerns continue to coast
In 2023, the insurance market experienced significant catastrophic losses early on, continuing the trend of high weather-related claims due to rising sea temperatures and increased property values along coastlines.
This led many reinsurers to reduce their property reinsurance capacity, with the remaining ones enjoying a stronger market position through higher attachment points and premiums. Although this market situation favours reinsurers, investor interest has been strained for some time.
Rising coastal property values in catastrophe-prone areas are testing the US insurance market. It wasn’t mentioned explicitly in AM Best’s report, but the risks are present elsewhere. In Australia, which has similar densely coastal populations prone to nat cats, the issues of capacity and affordability continue to be a concern.
AM Best predicts that reinsurers will likely keep their cautious approach given the uncertainty in the market.
Meanwhile, life reinsurers have seen a decrease in COVID-related mortality but are witnessing higher than-expected deaths from other causes like liver disease and drug usage. It’s unclear if mortality rates will return to pre-pandemic levels, and this uncertainty is affecting actuarial assumptions and future pricing.
Sufficient capital
By the end of 2022, reinsurance capital saw an 8.6% dip from the previous year, however this is anticipated to recover over 2023. Mid-2023 reports show a marked improvement, with the S&P 500 up by 16.9%, and net investment income for reinsurers on track or exceeding the previous year.
Improved underwriting results have been seen globally, and despite the third quarter typically showing losses due to US catastrophes, reinsurers have not been as affected at mid-year.
The ratings agency said in its report that, “Despite all the noise around unrealised investment losses and elevated catastrophe losses, the segment maintains sufficient capital,” pointing out also that ‘available’ capital does not equate to automatically ‘deployed’ capital.
Some reinsurers have seen a dip in their capital buffers, though AM Best said this is likely a temporary situation as higher fixed-income rates begin to augment asset values.
There has also been a shift as some reinsurers are reallocating resources away from property reinsurance into other lines, and collaborations with third-party capital providers are being used to manage risk.
The exit of some players from the market has opened opportunities for others, but raising new capital has been a challenge, particularly for new entries without the standing of established, diversified organisations.
Life in Life
AM Best said that new capital has been finding its way into the life reinsurance market, driven by robust annuity sales in the U.S. and corporate divestitures of intense capital and interest rate-sensitive business.
Private equity and asset managers are key sources of funds for newcomers in the life and annuity reinsurance sectors in the US, Bermuda, and Cayman Islands.
This inflow has intensified competition but also paved the way for innovation, with companies seeking diverse businesses and international deals, including in Japan, which is seeing increased reinsurance demand due to regulatory shifts and low interest rates.
Interest rate impact
Interest rate hikes have caused market disruptions, most notably unrealised investment losses for reinsurers. However, property/casualty reinsurers have maintained enough liquidity to handle these without shifting their strategies significantly to reduce capital.
As fixed-income assets mature, these firms are reinvesting in new, higher-yielding bonds, offsetting earlier losses and improving net investment income.
The cost of capital has also increased due to higher risk-free rates, affecting some reinsurers’ ability to raise new capital.
AM Best said that life reinsurers, facing larger unrealised losses due to their long-duration liabilities, must carefully match the duration of their investments to their liabilities, which has proven challenging in the current climate.
Nonetheless, they, too, are benefiting from higher yields in the rising interest rate environment, particularly by shifting towards higher-rated bonds.
Overall, AM Best said that reinsurers are facing a unique, potentially highly profitable market with historically high prices and terms, which has been referred to as a ‘generational’ opportunity.
However, the rating agency pointed out that challenges — like social inflation, climate change, and insurability issues, alongside unfamiliar high inflation conditions — present considerable uncertainty and cautioned about the uncertainty surrounding the market’s ability to adapt to new market dynamics and capitalise on pricing.
