Shifting dynamics drive a positive outlook for the global reinsurance segment

AM Best’s first ever upgrade of the global reinsurance market to positive from stable reflects continued underwriting discipline in the market. 

The global reinsurance market's continued underwriting discipline and the lack of new entrants into the market are the basis for AM Best’s unprecedented upgrade of its outlook from stable to positive, writes the ratings agency’s Carlos Wong-Dupuy. 

Nearly two decades ago, AM Best placed an initial stable outlook on the global reinsurance market segment. The significance of this milestone may not have been fully realised or appreciated at that time. Yet each year since, insurance industry observers have taken note of our view on this critical market segment and its underlying conditions. 

AM Best reached another milestone in early June, when we shifted the outlook for the global reinsurance segment from stable to positive, a status that had never occurred before. This response was driven by a perceived shift in market dynamics and discipline.

With respect to reinsurance, the most recent hardening market cycle differs from prior ones. In the past, softer pricing conditions have typically been followed by a significant natural catastrophe that would  erode industry capital and trigger a spike in prices. New entrants looking to capitalise would enter the market, pushing reinsurance pricing downward until the cycle repeated itself. A paradigm shift evolved in the January 2023 renewal season discussions, described by many as disorderly and some as chaotic, with rising reinsurance rates, higher attachment points, and tighter terms and conditions becoming key themes.

It’s apparent that large catastrophes are no longer the sole driver in higher reinsurance prices. For the US market, weather-driven losses are being compounded by secondary perils, such as high impact convective storms, which are pressuring the primary insurers’ property books of business. This form of market discipline being imposed by reinsurers on the primary segment is having an impact on their results. 

Stabilised underwriting profits became visible in 2021, with the hardening of the market confirmed by the aforementioned dislocation of the renewal season in early 2023. Cedants and reinsurers realigned their roles, with reinsurers retaking their historical role as providers of balance sheet protection rather than earnings stabilisers.

In 2023, the global reinsurance segment generated positive underwriting results for the third consecutive year, with several reinsurers reporting combined ratios below 90.0. Most players in the segment produced excellent return on equity (ROE) levels, in several cases exceeding 20%. Included among the other telltale signs underscoring our rationale for a positive outlook are: 

• Reinsurers’ profit margins are robust, following a period of drastic repricing, higher attachment points,

and tighter terms and conditions;

• Even as reinsurance rate increases decelerate, underwriting discipline is being maintained and

profit margins remain healthy to absorb higher loss activity than recently experienced;

• The global reinsurance segment remains well-capitalized, with no new players expected to disrupt current market discipline. Consolidation and flight to quality are more likely.

We believe that the exceptional ROE levels experienced in 2023 are unlikely to be repeated at such a high level, although reinsurers are expected to maintain underwriting discipline in the near term. Despite some signs of deceleration or slight rate softening at the most remote layers of protection, pricing is still robust and there remains limited appetite for higher frequency layers.

The tightening of terms and conditions is a critical factor—at least as important as rate increases—

contributing to the sustainability and stabilisation of technical margins. Going forward, we are looking at any likelihood of new entrants, but do not believe that's necessarily happening, at least not to the extent noticeable in previous hard cycles. 

Also, we will need to look very closely at what happens with interest rates. As high as interest rates may be at present, they are contributing to the operating performance of a number of companies. Fortunately, companies are not taking credit for that unduly and are focusing on their underwriting margins. We do not think that there will be any change to interest rates within a short period of time, but investor sentiment can shift. So far, what we see is significant prudence on how capital is being deployed. 

Since primary carriers are being forced to increase retention levels in a highly active claims environment, reinsurance demand remains strong. Despite the attractive returns experienced in recent periods, we also do not foresee any significant new entrants to the market. Well-respected management teams have been unable to raise capital to set up the new start-ups, which we have seen in prior hard market cycles. This lack of disruption by new entrants enables the preservation of discipline by seasoned players still recouping losses from previous years. Even if some new company formations were to materialise, we do not see that being disruptive in the market.

A key challenge for global reinsurers is finding the right balance between prudently deploying capital to support only those risks that can be priced adequately while maintaining a relevant role in an increasingly uncertain world due to geopolitical factors, climate trends, and societal or technological changes.

Overall, profit margins are healthy and sustainable for the foreseeable future. Reinsurance rate increases are decelerating, and there may be early signs of softening at the highest layers in the protection tower. However, we believe that the de-risking measures put in place in the last few years are unlikely to be loosened. This factor, combined with few new entrants, makes the preservation of underwriting discipline more likely than not.

Carlos Wong-Fupuy is a senior director, global reinsurance, at AM Best. He can be reached at carlos.wong-fupuy@ambest.com.

Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.