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Reinsurance capital drops as interest rates rise, appetite changes 

Traditional reinsurance capital dropped sharply last year due mainly to unrealised losses on assets caused by rising interest rates, while AM Best says a “potentially more notable driver” was a shift in appetite. 

“The invested asset declines are mainly temporary losses, which we believe will be recouped over the near to mid-term,” it says. 

“However, in 2022 some reinsurers decreased the capital allocated to volatile property catastrophe lines of business and instead deployed it to writing primary and specialty insurance lines.” 

The top 50 reinsurers had a 51% weighted average of net premium written allocated toward reinsurance lines from 2017-2021, but that dropped to 46.7% last year. 

“There is no clear indication when, or if, this trend will reverse and capital will be redeployed in reinsurance lines,” AM Best says. 

Traditional reinsurance capital declined to an estimated $US411 billion ($637 billion) at the end of last year from $US475 billion ($737 billion) a year earlier. It’s forecast to rebound to $US461 billion ($715 billion) this year. 

Third party capital has remained relatively flat at $96 billion ($149 million) and is forecast to rise to $US99 billion ($154 million) this year. 

AM Best says pure-play reinsurers have become a rarity in the market and recent price-to-book multiples indicate that investors favour a more balanced organisation with more stable operating performance, which is accomplished by writing a mix of volatile and stable business. 

“We expect this trend to continue as reinsurers seek to further diversity, reduce bottom-line volatility and consolidate throughout the hard market cycle,” it says. 

The annual estimate of global capital dedicated to supporting the reinsurance market is based on an AM Best examination of traditional capital and Guy Carpenter’s estimate of third party capital. 

The report says losses on assets have remained largely unrealised as organisations have been able to maintain adequate cash liquidity. 

“Still, the rapid mark-to-market loss increases the industry’s capital sufficiency risk, especially if an extreme loss event occurs before underwater bonds recover their market value,” the report says. 

AM Best says the positive move in reinsurance rates and improved terms and conditions has firms upbeat, and despite another active catastrophe year, underwriting results mitigated the impact of investment market turmoil on balance sheets. 

The combined operating ratio of 95.6% for AM Best’s global reinsurance compositive was the lowest since 2016, and reinsurers are this year benefitting from the new standard of higher attachment points and stronger returns from fixed income investment.