Improved risk management is paying off for reinsurers, according to a new report released August 22 by rating agency AM Best.
The Best’s Market Segment Report, Reinsurers Meet Cost of Capital for First Time in Four Years, states that reinsurers “generated returns well above the cost of capital in 2023 due to positive underwriting results, driven by repricing and portfolio de-risking.”
Pricing momentum
“The hardened market has led to more sustainable pricing momentum, enhancing reinsurers’ ability to meet their cost of capital over the medium term,” observed Sridhar Manyem, senior director, Industry Research and Analytics, AM Best.
The report notes that rising interest rates, stock market volatility, inflation and weather events have raised the cost of both debt and equity in recent years. The reinsurance industry’s median weighted average cost of capital rose in 2023 to 8.12%, notes AM Best.
Narrowing the extremes
“Sound risk management, strategic use of technology, and a maturing partnership with alternative capital have subdued the cyclical nature of the reinsurance market by narrowing the extremes,” says the report.
AM Best adds that the years when reinsurers’ returns exceed the cost of capital “are generally the ones with a lower frequency and severity of natural disasters.”
The report notes Swiss Re’s estimate that 2023 was the third consecutive year that global insured losses were above USD 100 billion. However, AM Best points out that in 2023, insured losses from natural disasters were primarily from many small to medium-sized events. “Most of the impact was retained by primary insurers,” explains the rating agency.
