Reinsurers see strong profits in 2023 amid market reset & hard pricing: AM Best

According to a new AM Best report, a strategic market reset by global reinsurers in 2023 has led to robust technical profits and a shift in industry dynamics.

AM Best’s Market Segment Report, Strong Technical Profits Bolster Momentum for Global Reinsurers, observed that this reset included a “much-needed” shift away from high-frequency layers, the adoption of tighter contract wording, and a better-defined scope of cover.

The combined effect of this strategy reportedly repositioned reinsurers’ traditional role to focus on providing capital protection to cedents, rather than stabilising earnings.

“AM Best believes that hard pricing conditions in reinsurance are likely to last longer than in previous cycles for several reasons. Chief among those, persistently high claims activity is being driven more by the accumulation of medium-sized losses and secondary perils than by single, major catastrophic events,” the rating agency added.

AM Best’s report also noted that the global reinsurance segment remains well-capitalized and that companies’ solvency positions have not been under meaningful pressure, apart from unrealized investment losses on fixed-income instruments, which have reversed.

Carlos Wong-Fupuy, senior director, AM Best, commented, “The current hard cycle has not been characterized by capital depletion. Unlike previous hard cycles and despite the very attractive pricing environment, new company formations have not materialized, particularly in the property catastrophe space. Disappointing results during the previous, prolonged soft market deterred potential new investors.”

Following the market dislocation during the January 2023 renewals, AM Best said it witnessed an “unequivocal change” confirming the current hard market conditions.

The rating agency concluded, “While benchmarking of reinsurers across the globe is now being challenged by the adoption of IFRS 17 accounting standards, the segment continues to expand and is producing return on equity at levels well in excess of their cost of capital.

“Meanwhile, combined ratios show very strong profit margins, more than offsetting concerns about adverse reserve development on certain legacy books of business, in particular U.S. casualty.”

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