AM Best has revised its outlook for the global reinsurance segment to positive from stable, signaling clear sailing ahead for the industry – but not without its challenges.
In 2023, for the third consecutive year, the global reinsurance segment generated positive underwriting results, with several reinsurers reporting combined ratios below 90%. In 2022, these results were heavily offset by unrealized investment losses in fixed income portfolios, which have since been mostly recouped due to higher reinvestment rates. In 2023, many reinsurers produced return on equity (ROE) exceeding 20%.
According to AM Best, recent improvements in underwriting margins followed a period of disappointing results after significant weather-related losses in 2017, including Hurricanes Harvey, Irma, and Maria. Efforts to reprice and tighten terms and conditions, alongside a reduced appetite for aggregate protection, a focus on named perils, and a shift from proportional to excess of loss covers, contributed to these improvements.
Additionally, several companies have reduced their exposure to natural catastrophe perils, especially in high-frequency layers, leading to more stable underwriting profits.
These profits became evident in 2021 with market hardening, confirmed by the dislocation of the renewal season in early 2023. Cedants and reinsurers realigned their roles, with reinsurers focusing on providing balance sheet protection rather than earnings stabilization.
AM Best anticipates that the exceptional ROEs seen in 2023 are unlikely to be repeated at such high levels, though reinsurers are expected to maintain underwriting discipline. Despite some signs of deceleration or slight rate softening at the most remote layers of protection, pricing remains robust with limited appetite for higher frequency layers. Tightened terms and conditions are crucial for sustaining and stabilizing technical margins.
Unlike previous hard market cycles, the current cycle is not characterized by a shortage of available capital. Recent negative rating actions on reinsurers have been driven by technical underperformance rather than surplus declines. The best performers continue to expand through oversubscribed capital raises and retained earnings but deploy resources prudently.
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Major European players maintain active special dividend and share buyback policies. Investors are more likely to allocate new funds to rated balance sheets with scale and a proven track record, or opportunistically to Insurance Linked Securities (ILS) structures where liquidity is critical.
The end of a period of record-low interest rates has changed the economic landscape, increasing competition for resources between the reinsurance segment and other investment alternatives.
This competition is intensified by the past underperformance of the segment and its perceived volatility, particularly given current climate trends and geopolitical instability. Despite de-risking measures on reinsurance portfolios, it will take time for investors to reduce the risk premium applied to reinsurers.
Unrealized investment losses in fixed income portfolios, resulting from sharp interest rate increases and reducing global reinsurers' capital and surplus in 2022, were largely reversed by the end of 2023.
Except for that particular year, dedicated capital for the global reinsurance segment has steadily expanded over the last decade. This recovery might have been more pronounced if not for sizeable dividend distributions by the largest groups.
AM Best’s positive outlook considers the challenges the global reinsurance segment still faces. Heightened natural catastrophic activity, increasing relevance of cyber risks, geopolitical uncertainty, and economic and social inflationary pressures remain crucial topics in the ratings assessment. Global reinsurers have generally leveraged their enterprise risk management frameworks to dynamically adjust strategies to a changing market environment.
Global reinsurers can adapt their business mix and risk profiles to evolving market conditions. Well-diversified organizations can use various strategies to enter and exit particular market segments based on performance expectations.
Examples include the shift away from high-frequency layers in property natural catastrophe coverage, increased caution in writing certain US casualty lines, and the repricing and tightening of terms and conditions to reduce uncertainty linked to unforeseen events such as global pandemics or international armed conflicts.
A key challenge for global reinsurers is balancing prudent capital deployment to support adequately priced risks while maintaining relevance in an increasingly uncertain world due to geopolitical factors, climate trends, and societal or technological changes.
Historically, reinsurers have demonstrated their ability to innovate and refine underwriting tools, as seen with natural catastrophe models and the development of ILS instruments. This trend is expected to continue, given the rising importance of new risks in cyber, secondary perils, and certain casualty lines.
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