Substantial rate improvements, higher attachment points and rising investment income are combining with increased demand for reinsurance cover to create a stable outlook for the global reinsurance sector, according to AM Best.

Of course, headwinds still exist for reinsurers such as the “persistent, growing uncertainty about underlying risks, including frequency and severity of weather-related activities and evolving risk profiles,” said the report, titled “Market Segment Outlook: Global Reinsurance.”

Other negative factors affecting the market include cautious new capital (despite improved market conditions) and concerns about economic and social inflation, the report added.

“Consistent with recent history, insurers have been plagued by elevated weather-related losses, including secondary perils,” said Carlos Wong-Fupuy, senior director, AM Best, in a statement. “Rising sea surface temperatures and elevated coastal property values continue to adversely impact modeled loss projections.”

These factors have prompted many reinsurers to retract significant amounts of capital from the property reinsurance market, the report said, noting that those reinsurers that have stayed in the market have benefited from reduced supply via drastically higher attachment points and higher risk-adjusted rates-on-line.

Some of those that remained have looked to fill the gap created by those that have exited the market, but new capital remains cautious, AM Best said, explaining that raising capital in the current economic environment often has proven difficult.

“Established, high-quality and diversified organizations have been able to raise capital to support expansion efforts through the hard cycle. New entrants, despite varying business plans and strong management teams supporting them, have had more difficulty obtaining funding. Although new entrants could eventually obtain funding, they are unlikely to obtain enough to move the market in a meaningful way.”

Despite some disparity between primary insurers’ and reinsurers’ underwriting returns during 2023, AM Best believes reinsurers won’t be relaxing their stance for some time.

Reinsurers, across the board, have reported improved underwriting results. “Although the third quarter is typically the loss-making quarter for reinsurers in the U.S. market, many primary insurers have reported substantial catastrophe activity at mid-year 2023 that hasn’t impacted reinsurers.”

Casualty Reinsurance

Some casualty reinsurers have seen pockets of adverse reserve development, triggered mainly by social inflation in the U.S., which has led some larger players to cut their exposures, mainly in the areas of public directors & officers and excess casualty reinsurance, the report noted. “Reinsurers will need to maintain prudent loss reserving methodologies to account for the impact of social inflation, as well as general inflation, in the years to come.”

Investment Income

The report addressed the impact of the rise in interest rates for the sector, particularly with regard to unrealized investment losses. “The mark-to-market losses many insurers experienced was not substantial enough to result in a strategic shift in business to reduce capital burdens,” said Dan Hofmeister, senior financial analyst, AM Best. “Property/casualty reinsurers retained adequate liquidity and were able to recoup much of their losses as their fixed-income investments matured.”

Net investment income for the reinsurance sector is already approaching — and in some cases has exceeded — the prior year’s total, the report said.

A video of AM Best Senior Director Carlos Wong-Fupuy’s comments on the global reinsurance segment outlook, is available here.