A new AM Best special report – its latest annual look at the global reinsurance industry – shows that reinsurers are under intense pressure to generate returns sufficient to meet their cost of capital following several years of disappointing results. 

“Despite the severe drop in available capital for the segment,” AM Best writes in its most recent Best’s Market Segment Report: Global Reinsurers Face Challenges Even as Conditions Improve, “Best does not perceive undue pressure on the balance sheet strength of any of the major reinsurance players.”

That’s because inflation concerns during 2022 prompted key players to take reserve-strengthening actions, they write. 

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“Reinsurers have generally realigned their risk profiles and are in a strong position to generate underwriting profits that have eluded them for a few years,” AM Best writes. 

However, the current market seems to be one of the hardest experienced in decades. 

Profitability improved in 2021, reflecting key players’ shift from lower and medium layers of property catastrophe risks, tightened contract wording, and the redeployment of capital toward casualty and specialty lines, they write. 

Despite a more cautious underwriting approach, 2022 technical results were under pressure due to the unexpected severity and geographical spread of major weather events.

As a result, profitability ratios slumped again in 2022, compounded by unrealized investment losses, according to AM Best.

AM Best conducted liquidity stress tests on rated companies and examined their balance sheet strengths – BCAR (Basel Capital Adequacy Reporting) scores for the top 50 insurers fell in the “strongest” and “very strong” categories. 

However, they write, the first half of 2023 has been more promising, with better results than the prior two years. 

Making a prediction, the report says, the risk environment for the global economy will only become more complex, owing in large part to climate trends, which make weather events harder to predict. 

Regardless, AM Best says, innovation is key and technology-based solutions are increasingly providing answers for risk prevention, helping determine whether a risk is insurable or not.