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Monte Carlo 2022

Economic headwinds may dampen reinsurance capital growth

Businessman defying strong headwind

Though underwriting gains are likely to offset some losses, says AM Best

Dedicated reinsurance capacity in 2021 rose to $568bn, driven by an increase of nearly 11% from traditional reinsurance capacity providers, AM Best said. However, the rating agency believes the spike may be short-lived – depressed investment markets, continued geopolitical turmoil and a potential decline in global gross domestic product may dampen growth in 2022.

“Although AM Best expects headwinds in the capital and investment markets to continue in 2022, dragging down traditional capital levels, some of these losses likely will be offset by underwriting gains,” says Dan Hofmeister, senior financial analyst at AM Best. “The historical lack of a strong correlation between underwriting and asset returns may indicate relatively flat capital levels, but the repeat of a severe property catastrophe season in 2022 could prove to be adverse for reinsurers.”

AM Best expects capital to slide back in 2022, after a decade of year-over-year increases. Reductions in primary reinsurance capital are driving the trend, AM Best said in its report, ‘Dedicated reinsurance capital growth of 2021 may not continue’.

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The report also notes that many reinsurers substantially reduced their property exposure through the last renewal cycle. On the third-party reinsurance capacity side, the pullback of traditional reinsurance in catastrophe exposed markets such as Florida has created opportunities for insurance-linked securities (ILS) funds. By taking advantage of the lack of capacity, some ILS funds have been able to capitalise on not only significant price increases, but also on tighter terms and conditions, AM Best said.

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