Cautious capital deployment contributes to discipline: AM Best

A cautious deployment of capital has contributed to reinsurance discipline, AM Best analysts have highlighted, as they continue to observe the lack of new entrants in the market that typically feature in previous hard cycles.

“Historical underperformance, a riskier environment that is more difficult to model and price and, most importantly, a new phase of more elevated interest rates, all contribute to a higher risk premium for potential investors looking to fund new ventures,” AM Best explained.

Adding: “In the meantime, dedicated capital in the global reinsurance segment continues to recover and expand.”

Surplus growth followed the sharp reduction from unrealized investment losses due to the increase in interest rates in 2022. The main contributors to this growth include maturing fixed-income instruments, higher reinvestment rates, and retained technical profits

Analysts highlight that there has been a shortage of capital available at any point, and stated: “Although we saw a decline in the buffer in companies balance sheets, BCAR scores at all times were in line with the “Strongest” level of capitalization. When global reinsurers’ ratings have been under pressure, the main driver has been disappointing operating performance, not a fragile capital position.”

In its report, AM Best noted that it is not that new capital has not been entering the market, but that the preferred beneficiaries are either well-established rated balance sheets-with strong track records and excellent market positions, or opportunistic, highly liquid alternatives in the ILS space.

Shareholders’ equity for most of the segment players also continues to expand, something that is happening more rapidly at the top amid a market where scale and the ability to provide a broad and comprehensive offer has become more critical.

AM Best analysts concluded: “What we are seeing is the organic consolidation of a segment able to generate profits to finance further expansion.

Dominated by the largest players, scale, diversification, and flexibility to adapt to fluid market conditions have become keys to success. Sophisticated risk management, strong balance sheets, and partnerships with the ILS/retrocessional markets are contributing to consistent and more stable results.”

They highlighted: “Although a cautious deployment of capital and a certain level of retrenchment have been necessary to restore profitability, the market position, balance sheet strength, and expertise that the leading players enjoy put them in an ideal position to gradually assume more of the emerging risks that are becoming dominant in a rapidly evolving economy.”

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