Insurance companies dealing with reinsurers have likely noticed constraints discussed in a new AM Best market segment report, entitled Meeting Cost of Capital a Challenge for Some Reinsurers. In the report, they say a shortage of property catastrophe capacity, concerns about prior year reserve development, economic and social inflation and a dearth of new capital have driven a hardening of the reinsurance market.
“Reinsurers did not meet the cost of capital in any of the past three years,” says Helen Andersen, industry analyst, research and analytics with AM Best. “Reinsurers have been unable to meet their cost of equity since 2019 as well. Achieving hurdle rates will be difficult amid economic and social inflation, as well as escalating weather losses, despite significant price increases.”
Investors, meanwhile, are monitoring the ability of reinsurers to generate returns. “The hardening market points to more sustainable pricing momentum, which could help reinsurers meet their cost of capital over the medium term. However, economic and social inflation and the growing frequency and severity of weather events will increase uncertainty. Even as capital comes back cautiously in this environment, AM Best is not seeing substantial erosion of pricing conditions,” they add.
The report states that rising interest rates and equity market volatility is making the cost of capital higher than the historical average. “Reinsurers that can balance long-term strategies with effective tactical decisions and sound risk management can still meet – or even exceed – return expectations,” they write.
