Ratings agency AM Best has revised its outlook for the global reinsurance industry from stable to positive, the first ever such positive outlook for the segment, they state. They add that the main driver for the change has been a refocused effort on achieving technical profitability, coupled with the fact that no single major natural catastrophe event occurred during 2023.
Primarily, however, they say reinsurers have taken corrective measures following several years of sub-par underwriting and underperformance. They add that hard pricing conditions are expected to last longer than in past cycles.
Adoption of tighter contract wording
“These measures have included a much-needed shift away from high-frequency layers, the adoption of tighter contract wording and a better-defined scope of cover with the combined effect having repositioned reinsurers’ traditional role to focus on providing capital protection not cedents, rather than stabilize earnings,” they write.
“Higher attachment points, lower limits, added exclusions and narrower contract wording generally signify that most of the working layers’ claims cost are being retained by the primary carriers.”
The report, Strong Technical Profits Bolster Momentum for Global Reinsurers, also notes that unlike previous cycles, new company formations have not materialized, thanks to higher risk premiums for potential investors than in the past. (The higher risks and barriers to entry include historical underperformance, a riskier environment that is more difficult to model and price and elevated interest rates.)
Absence of new entrants
Hard market conditions are expected to continue, thanks to this absence of new entrants but also thanks to higher return expectations from investors, both to make up for previous years and to match higher yields from competing alternatives. “The current hard cycle has not been characterized by capital depletion,” adds Carlos Wong-Fupuy, senior director with AM Best.
“The main factor in AM Best’s decision to assign a positive outlook to the global reinsurance segment has been the positive technical results that the composite has generated for a third year in a row and the expectation that these will be sustainable for at least another couple of years,” the report states. “Even as benchmarking is challenged globally by the adoption of IFRS 17, the reinsurance segment continues to expand, with ROEs comfortably exceeding the cost of capital.”
