Rating agency AM Best believes that in the current hard market cycle, reinsurance companies are likely to preserve their underwriting discipline for longer than in previous cycles, suggesting rates could hold better this time than has been seen in the past.
AM Best notes the difference between “available” and “deployed” reinsurance capacity, noting that traditional reinsuers are being more protective of their capital this time around and seem keen to hold onto the gains in returns which are just beginning to earn through for them.
“The January 2023 renewals highlighted the mismatch between supply and demand, but it’s also important to recognize the difference between ‘available’ and ‘deployed’ capacity. Available capital is not under pressure; however, the well-established global reinsurers have become much more cautious allocating their capital, which pressures the deployment of capacity,” explained Carlos Wong-Fupuy, senior director, AM Best.
Another difference to previous cycles, is that “the price discovery path has taken longer than expected, as the last six years have seen a slow, protracted process of reinsurers realigning their risk profiles, reallocating capital, re-underwriting and repricing,” AM Best explained.
Adding that, “In the past few years, there has been a shift toward non-catastrophe risks, especially for carriers heavily affected by losses in previous years.
“With much-harder market conditions since the start of 2023, interest in property catastrophe risks has renewed cautiously.”
As well as more caution over their capacity deployment, global reinsurers are all battling with a wide-range of pressures today.
AM Best highlights that, “Concerns about economic and social inflation, central banks’ contractionary monetary policies, asset market volatility, and the recent underperformance of the global reinsurance segment have translated into a higher cost of capital as well.”
But, despite a severe decline in shareholders’ equity, AM Best said that “global reinsurers remain well capitalized.”
“Given reinsurers’ prudent approach to deploying capital, they are likely to preserve underwriting discipline for a longer period than in previous cycles,” the rating agency says.
Further noting that, “However, market participants are under pressure to innovate, expand their presence and assert their role in an evolving economy in which today’s emerging risks will soon become the dominant ones.”
“Investors will likely demand a strong commitment to underwriting discipline, as well as flexibility to adjust to changing conditions in the business cycle,” Wong-Fupuy added. “Well-established, diversified companies with a proven track record are better positioned to succeed in this effort than startups that are pressured to meet top-line targets.”
All of which suggests that the rating agency feels the hard market could be more protracted than we’ve seen at other periods in history.
Alongside this, the slow resurgence of insurance-linked securities (ILS) capacity, where it’s important to differentiate between deployable capital and assets under management, is another factor that also means this cycle could see discipline held for longer, than many who have experienced the peaks and troughs before will be used to seeing.