Reinsurers to stand firm in coming renewals despite ‘plentiful’ capital: AM Best

Corporate insurance buyers shouldn’t expect softening in the reinsurance market during coming renewals to help their cause, despite decent combined ratios from most carriers and “plentiful” capital driven by strong underwriting results, according to AM Best. The agency says that while reinsurers may have plenty of capital and there have been some new entrants, inflationary pressure and uncertainty over investment market conditions will basically persuade reinsurers to “keep their powder” dry and play a cautious game. AM Best notes that reinsurers remain nervous about property catastrophe lines in the face of climate change and continue to pull capacity from this area. This capacity has been reallocated to casualty and specialty lines, but exposures and limits are being conservatively managed, not least for large corporate casualty and cyber risks, it adds. AM Best’s expects reinsurance capacity to fall a touch this year but remain in strong supply. “For year-end 2022, based on how the investment markets have reacted so far to the interest rate hikes as well as fears of sustained inflation and a potential recession, we expect a decline in overall available capital. Based on conservative estimates, we may see a return close to the levels observed at the end of 2020,” states AM Best. “Still, available capital growth has been aided by improvements in underwriting results, which reflect a re-alignment of most companies’ risk profiles toward more profitable and stable lines of business, the benefit of higher prices, and reduced exposures to property cat. We expect this to continue, even if inflationary pressures may squeeze some of those margins,” it continues. “Although available traditional capital continues to expand, an important distinction has to be made between ‘available’ and ‘dedicated’ capital — ‘available’ does not translate automatically into ‘dedicated’. The fact that available capital remains plentiful — over the last five years less than 85% was needed to support a BCAR (Best’s Capital Adequacy Ratio) assessment of ‘Strongest’ — has fortunately not translated into lack of underwriting discipline,” explains AM Best. The ratings agency says that reinsurers remain focused on stabilising results and consistently working to meet their cost of capital, which it describes as a mixed bag. “Given the current market uncertainty, most players feel the need to keep a material amount of dry powder to protect their balance sheets against market fluctuations and to deploy resources prudently when the right opportunities arise,” says AM Best. “Unlike previous ‘hardening’ — or should we say ‘firming’? — cycles, new capital has not had a material impact on market conditions. After early signs of enthusiasm and the emergence of a few start-ups since 2019, execution has been slow and inconsistent. Regulatory and recruitment delays have played a role. Business plans have been downsized or changed suddenly based on opportunistic deals rather than on solid strategies. Several projects have not seen yet the light of day. Crucially, investors remain extremely cautious,” it states. And this time around it is unlikely that third party capital seeking to take advantage of firm conditions will come to the aid of insurance and reinsurance buyers. “Third-party capital, while typically is expected to react more swiftly to market conditions, seems subject to the same level of scepticism. More restrictive covers, terms and conditions are commonplace. Despite higher demand and improved pricing, the volatility of recent claims remains the key issue. Issues with regard to trapped capital have not gone away completely. ‘Loss creep’ remains well within the memory of investors,” states AM Best. “If we have another active property catastrophe year — even one with no major catastrophic event, but an accumulation of several medium-sized ones as in the recent past — and inflationary pressures continue, combined with recession fears, uncertainty could remain so high that few investors will feel comfortable deploying capital regardless of the price. A few new entrants will still try, but their impact is likely to be limited in a market in which rates could continue to rise in response to more limited dedicated capacity,” concludes the agency.

Reinsurers to stand firm in coming renewals despite ‘plentiful’ capital: AM Best

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