The growth of global reinsurers’ profits, which will be stable in the short and medium term, was the main reason for AM Best’s positive outlook for the global reinsurance market.
However, analysts remain concerned about the effectiveness of existing catastrophic loss reserves, especially for the years of natural disasters from 2016 to 2019, as well as instability due to climate risks and the economic and geopolitical environment.
AM Best described the conditions that led the rating agency to change its outlook for the reinsurance market from stable to positive, the first ever improvement in the outlook for the market.
The global reinsurance market delivered a strong performance in the first half of 2024, with further improvements in underwriting profitability, ROE and continued capital build-up by reinsurers. The resilience of earnings was further enhanced by higher underlying ROE, which provides reinsurers with an additional buffer to absorb losses.
Over the past year, reinsurers have seen rates return to levels not seen since 2006. At the same time, interest rates have recovered somewhat from historic lows, says Carlos Wong-Fupui, senior director of global reinsurance ratings at AM Best. These conditions have allowed the reinsurance market to stabilize.
Positive prospects for the reinsurance market
The positive outlook for the reinsurance market stems from the reduction of risks, as well as the growth of reinsurance tariffs with changes in terms and conditions and coverage limits – factors that are as important as price increases, making margins stable in the short and medium term.
Despite the improved conditions, the reinsurance market lacked new entrants, indicating a more disciplined approach by investors. Although capital is available, it has become more efficient.
Demand is growing for more complex and emerging risks, such as cyber risks and artificial intelligence. The growth in demand for complex risks has pushed reinsurers away from risks such as reinsuring secondary risks or providing income statement protection.
The strategic reboot of the reinsurance market by global reinsurers has led to high technical profits and changed the dynamics of the industry.
New reinsurers focus on complex risks
There has been a shift in reinsurers’ focus to complex risks, such as cyber and new technologies, and away from more volatile, frequent losses. Interest rates are starting to decline again this year, and this may portend a loosening of monetary policy, which for the reinsurance market could mean excess capital, lower rates, and increased competition. This is potentially not good for the industry, analysts say.
Geopolitically, global tensions remain high, and this year’s US elections may have an impact. The increase in the underlying underwriting margin was driven by a significant improvement in the underlying combined ratio. The underlying underwriting margin increased from 2.7% a year ago to 3.9%.
The mid-year renewal of reinsurance contracts further consolidated the positive trends in the market, laying the groundwork for a more competitive reinsurance market in 2025.
The ratio of reinsurers’ prices to book value reaches a peak, prompting speculation about M&A activity.
Trends in casualty reinsurance and reserve development
AM Best monitors trends in property and casualty reinsurance, particularly in the United States.
The increase in reinsurance rates for property catastrophes is likely to slow to below 10% on average when reinsurance contracts are renewed in January 2025. Thus, the improvement in underwriting margins will be less significant than in 2023.
Given the comprehensive risk mitigation measures and the reallocation of interests between reinsurers and insurers, as well as the lack of new entrants to the market, AM Best expects the tight pricing environment to last longer than in previous cycles.
Non-life alternative capital grew by USD 6 billion (+5.6%) to USD 113 billion, driven by higher returns and capital inflows, particularly in the form of catastrophe bonds.
Reinsurance operating results were strong in 2023 and will remain so in 2024. The companies generated sufficient profits to cover the cost of capital last year and this year.
How has the adoption of IFRS 17 affected the reinsurance industry?
At the same time, IFRS 17, which came into force on January 1, 2023, has been adopted by many reinsurers, a move that has created challenges for users of the new financial standard as they adapt to its provisions. This change also prompted AM Best to change its list of the largest reinsurers depending on the reporting standard used.
The difference between old standard premiums and IFRS 17 reinsurance income does not allow for a direct comparison. The combined reinsurance ratios are slightly different, with discounted combined loss ratios under IFRS 17.
The requirements of IFRS 17 may lead to accounting mismatches and volatility in profits and losses as a direct result of an insurer’s reinsurance management strategy and contracts entered into today.
IFRS 17 is the most recent IFRS standard for insurance contracts, replacing IFRS 4 in 2022. It specifies which insurance contract items should be recognized in an insurance company’s balance sheet and income statement, how to measure those items, and how to present and disclose that information.
Prospects for the development of the life reinsurance market
Life reinsurance has been actively developing, with four or five large players dominating the life reinsurance market. Several new reinsurers were established in offshore companies.
New private equity-backed insurance companies were created, as well as asset managers who receive commissions for managing assets by moving them to their offshore reinsurance subsidiaries.
More private assets are moving into insurance and reinsurance, making valuation more difficult for analysts and liquidity testing more important. European life reinsurance companies improved their performance in 2023-2024, taking advantage of the decline in COVID-19-related mortality.