Hard reinsurance market hasn't cleared the hurdles to draw new capital

A hardening reinsurance market with improved underwriting amid strong demand have blunted, but not wiped away the “highly uncertain market conditions” and damaging nat cat loss record of recent years, the  AM Best rating agency has said in a sector review.

By the bottom line, the outlook for the sector remains “stable,” albeit precariously balanced between conflicting drivers.

Rate increases, especially in the much-watched property cat segment, may have proven notable, but need not have crossed the adequacy threshold, analysts suggest.

“Few reinsurers feel that rate increases have reached that point yet,” AM Best analysts wrote. Acceleration continues in rate gains for property cat, hoisting a key industry rate on line pricing index at a pace not seen since 2006, albeit leaving that index nominally below levels seen as long ago as 2009.

Price inadequacy and earnings volatility in nat cat has shifted capacity into other lines.

“Reinsurers strongly prefer stable results over the potential for larger but volatile profit margins,” analysts continued, citing the myriad of cases where reinsurers have capped or dropped property cat exposure.

Those lessons have been hard-learned: heightened nat cat activity “continues to test investor risk tolerance levels” and has been compounded by a large swathe of uncertainties, from the geo-political to the economic.

The bottom line: an “instability of financial results and inability of most players to meet their cost of capital.”

The proof lies in the lack of fresh capital.

“Unlike previous hardening cycles, new capital has not had a material impact on market conditions,” analysts noted.

Third party capital should theoretically move faster, but instead shows “the same level of scepticism” as among leaders in traditional capacity.

Overall capacity to end-2022 is likely to decline, led by the impact of mark-to-market valuations on assets and event losses and trapped capital in ILS, AM Best analysts added, without offering specific forecast.

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