AM Best has revised its outlook for the global reinsurance sector to positive from stable, signaling clear sailing forward for the industry – but not without challenges.

In 2023, for the third year in a row, the global reinsurance sector achieved positive underwriting results, with many reinsurers reporting combined ratios of less than 90%. In 2022, these results were largely offset by unrealized investment losses in fixed income portfolios, most of which have since been recovered due to higher reinvestment rates. In 2023, several reinsurers achieved a return on equity exceeding 20%.

According to AM Best, the recent improvements in underwriting margins follow a period of disappointing results following significant weather-related losses in 2017, including Hurricanes Harvey, Irma and Maria. Efforts to repricing and tightening terms and conditions, coupled with a decline in the desire for overall protection, a focus on specific risks, and a shift from pro rata coverage to excess loss coverage, have contributed to these improvements.

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In addition, many companies have reduced their exposure to natural catastrophe risks, especially in high-frequency tiers, resulting in more stable underwriting profits.

These profits became evident in 2021 as the market hardened, underscored by renewal season disruption in early 2023. Insurers and reinsurers have realigned their roles, with reinsurers focusing on providing balance sheet protection rather than stabilizing profits.

One-time exceptional 2023 equity returns

AM Best expects that the exceptional equity returns seen in 2023 are unlikely to be repeated at these high levels, although reinsurers are expected to maintain underwriting discipline. Despite some signs of a slowdown or slight decline in rates in outlying protection layers, prices remain strong with limited appetite for higher frequency layers. Tight terms and conditions are essential to maintain and stabilize technical margins.

Unlike previous difficult market cycles, the current cycle is not characterized by a shortage of available capital. Recent negative rating actions on reinsurers were driven by weak technical performance rather than a decline in surplus. Top-performing companies continue to expand through increased subscribed capital and retained earnings, but they use resources wisely.

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Major European players maintain special dividend policies and active share buybacks. Investors are likely to allocate new funds to rated balance sheets with broad scale and track record, or opportunistically to insurance-linked securities (ILS) structures where liquidity is critical.

The end of a period of record low interest rates has changed the economic landscape, leading to increased competition for resources between the reinsurance sector and other investment alternatives.

This competition is intensified by the sector’s past poor performance and notable volatility, especially in light of current climate trends and geopolitical instability. Despite de-risking measures for reinsurance portfolios, it will take some time before investors reduce the risk premiums applied to reinsurers.

Reverse investment losses

Unrealized investment losses in fixed income portfolios, resulting from sharp increases in interest rates and declines in global reinsurers’ capital and surplus in 2022, were largely reversed by the end of 2023.

With the exception of that particular year, capital allocated to the global reinsurance sector has expanded steadily over the past decade. This recovery could have been more pronounced were it not for the large dividend distributions by the larger groups.

AM Best’s positive outlook takes into account the challenges the global reinsurance sector continues to face. Increased natural catastrophic activity, increasing importance of cyber risks, geopolitical uncertainty, and economic and social inflationary pressures remain critical themes in evaluating the ratings. Global reinsurers have generally leveraged their enterprise risk management frameworks to dynamically adjust strategies to match the changing market environment.

Global reinsurers can adapt their business mix and risk profile to evolving market conditions. Well-diversified organizations can use different strategies to enter and exit certain market segments based on performance expectations.

Examples include a shift away from high-frequency tiers in coverage of natural disasters, increased caution in writing certain lines for victims in the United States, and repricing and tightening terms and conditions to reduce uncertainty associated with unexpected events such as global pandemics or international armed conflicts.

A key challenge for global reinsurers is to balance prudent deployment of capital to support appropriately priced risks while maintaining relevance in a world of increasing uncertainty due to geopolitical factors, climate trends and societal or technological changes.

Historically, reinsurers have demonstrated their ability to innovate and improve underwriting tools, as seen in natural catastrophe modeling and the development of ILS tools. This trend is expected to continue, given the increasing importance of new cyber risks, secondary risks and some infection lines.

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