Reinsurance capital will shrink 7% in ‘22 as markets hit balance sheets

Dedicated reinsurance capacity may fall by some 6.7% in 2022 after a surge of gains in 2021, as capital market volatility wipes out value in excess of a hoped-for continuation of underwriting strength, analysts at  AM Best said in a joint report with  Guy Carpenter.

The 6.7% decline to $530 billion, including an 8.4% decline in traditional capital lightly offset by minor gains in third party capital, will still leave the industry a fractional 2.1% above 2020 levels.

The 8.4% decline in traditional capacity from reinsurance standbys to $435 billion follows "both the tailwinds of the underwriting market and the headwinds of the capital and investment markets, continued geopolitical turmoil and a potential decline in global GDP," authors wrote. That capacity measure had risen 10.7% in 2021 on the one-two punch of hard-market underwriting strength and market gains.

2022 market losses, not expected to reverse fully any time soon, have put paid to that narrative, analysts claimed.

The decline in capital stemming from market losses will push capital utilisation measures to long-term highs, making overall capacity looked pinched by any historical measure.

That puts the industry record close to thresholds. Capital utilisation could rise 5 percentage points to 87% by end-2022, breaking a four-year tight range around the 80-82% mark, analysts claimed

"We expect that the rise in required capital and the deterioration of available capital throughout 2022 will result in the highest capital utilisation levels in recent history,” authors wrote.

While the measurement is burdened with myriad difficulties measuring what portion of capital at mixed-line primary and reinsurance groups is dedicated where, the trend is unfavourable. Reinsurers with primary insurance operations look very likely to direct more of their available capital to primary coverage than to date.

Even those forecasts are predicated upon continued strength in underwriting.

"Capital utilisation levels could become further stressed in the event of an unfavourable property catastrophe season or material secondary period activity," analysts wrote. "With interest rate predicted to continue rising and equity markets struggling, the reinsurance market's need for strong underwriting returns in 2022 is paramount."

A top-off capacity layer from third party capital, including ILS, offers comparable stability. Third party capacity could inch up by a billion to $95 billion, roughly matching the record take from 2018, according to estimates generated by Guy Carpenter.

The segment "battles with loss fatigue" but could yet take wind from "enhanced opportunities," including a gap left by traditional reinsurers on the Florida market, analysts wrote.

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