Most companies in the global reinsurance market are benefiting from enhanced reinvestment rates, marking a significant shift from the prolonged soft market, according to AM Best’s recent market segment report.
During the soft market period, which lasted through 2017, reinsurance rates were exceptionally low due to an oversupply of capital. This oversupply was driven by a low interest rate environment that led investors to seek higher returns in insurance-linked securities (ILS).
Even major catastrophes, such as the hurricanes of 2017, did not significantly reduce the available traditional reinsurance capital. As a result, the market experienced intense competition and constrained profitability for traditional reinsurers.
Since around 2017, hardening conditions emerged, driven by slower growth in ILS capital, while traditional reinsurance continued to expand.
Reinsurers have gradually repriced, adjusted terms and conditions, and moved away from frequency events by raising attachment points and reducing limits.
Additionally, the increase in interest rates starting in 2021 has enabled reinsurance companies to earn better returns on their investments, boosting overall profitability.
AM Best reiterated, “Gradually, companies started repricing, tightening terms and conditions, moving away from property cat reinsurance by elevating attachment points and reducing limits, and expanding their primary and reinsurance operations as well as casualty books.
“The first signs of recovery occurred in 2021, when, for the first time in several years, AM Best’s global reinsurance composite had combined ratios below 100. Despite continuing the positive trend in technical profitability, underwriting results were heavily countered by the unrealized investment losses on fixed-income investments in the second half of 2022, following sharp increases in interest rates.”
AM Best highlighted that in 2023, following disruptions in the January renewals due to uncertainties from Hurricane Ian, hard market conditions became more evident.
Despite new challenges related to the adoption of IFRS 17, the industry remains robust. Companies are achieving returns on equity (ROEs) well above their cost of capital, and combined ratios are showing strong profit margins, effectively addressing concerns about adverse reserve developments, particularly in US casualty lines. Most companies continue to benefit from improved reinvestment rates, reinforcing the positive outlook for the reinsurance market.
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