AM Best, a global credit rating agency, has given the reinsurance industry a positive outlook, indicating strong future prospects. However, the industry will still face some challenges along the way.

Positive Financial Results

In 2023, the global reinsurance segment achieved positive financial results for the third year in a row. Many reinsurers reported combined ratios below 90%, showing they made more money from premiums than they paid out in claims. Additionally, the industry saw return on equity (ROE) surpass 20%. This impressive performance came despite earlier losses in fixed income portfolios, which were offset by higher reinvestment rates.

Changes in Underwriting Practices

A key factor in these improvements was changes in underwriting practices following poor results from significant weather-related losses in 2017, including Hurricanes Harvey, Irma, and Maria. Reinsurers adjusted by repricing policies, tightening terms, and focusing on specific risks rather than broad coverage. They moved away from proportional coverage to excess of loss covers, which means they pay only for losses exceeding a certain amount.

Reduced Exposure to Catastrophes

Many reinsurers reduced their exposure to natural catastrophes, especially in high-frequency layers, leading to more stable profits. This cautious approach became evident in 2021 with market hardening, confirmed during the 2023 renewal season. During this time, cedants (companies buying reinsurance) and reinsurers realigned, with reinsurers focusing on protecting their balance sheets rather than stabilizing earnings.

Exceptional ROEs and Future Expectations

While the exceptional ROEs seen in 2023 are unlikely to repeat at the same high levels, reinsurers are expected to maintain discipline in their underwriting. Prices remain robust despite some signs of slight rate softening at the most remote layers of protection. Tightened terms and conditions are essential for sustaining technical margins.

Capital and Market Conditions

Unlike previous hard market cycles characterized by a shortage of capital, the current cycle has plenty of available capital. Recent negative rating actions were driven by technical underperformance rather than declines in surplus. The best-performing companies are expanding through capital raises and retained earnings but are deploying resources cautiously.

Investment Environment and Competition

The end of record-low interest rates has changed the economic landscape, increasing competition for resources between the reinsurance segment and other investment alternatives. This competition is intensified by the past underperformance of the segment and its perceived volatility, particularly given current climate trends and geopolitical instability. Despite de-risking measures on reinsurance portfolios, it will take time for investors to reduce the risk premium applied to reinsurers.

Reversal of Investment Losses

Unrealized investment losses in fixed income portfolios, caused by sharp interest rate increases and reducing global reinsurers' capital and surplus in 2022, were largely reversed by the end of 2023. Dedicated capital for the global reinsurance segment has steadily expanded over the last decade, except for that particular year. This recovery might have been more pronounced if not for sizeable dividend distributions by the largest groups.

Challenges and Risk Management

Despite the positive outlook, the global reinsurance segment still faces challenges. Heightened natural catastrophic activity, increasing relevance of cyber risks, geopolitical uncertainty, and economic and social inflationary pressures remain crucial topics in the ratings assessment. Global reinsurers have generally leveraged their enterprise risk management frameworks to dynamically adjust strategies to a changing market environment.

Adapting to Market Conditions

Global reinsurers can adapt their business mix and risk profiles to evolving market conditions. Well-diversified organizations can use various strategies to enter and exit particular market segments based on performance expectations. Examples include the shift away from high-frequency layers in property natural catastrophe coverage, increased caution in writing certain US casualty lines, and the repricing and tightening of terms and conditions to reduce uncertainty linked to unforeseen events such as global pandemics or international armed conflicts.

Balancing Capital Deployment

A key challenge for global reinsurers is balancing prudent capital deployment to support adequately priced risks while maintaining relevance in an increasingly uncertain world due to geopolitical factors, climate trends, and societal or technological changes. Historically, reinsurers have demonstrated their ability to innovate and refine underwriting tools, as seen with natural catastrophe models and the development of Insurance-Linked Securities (ILS) instruments. This trend is expected to continue, given the rising importance of new risks in cyber, secondary perils, and certain casualty lines.

While the global reinsurance segment is on a positive trajectory, it must navigate various challenges and continue to adapt to changing market conditions and emerging risks.

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