AM Best sees reduction in traditional reinsurance capital

29 August 2022

AM Best says traditional reinsurance capital may decline by about 8% this year reflecting depressed investment markets, continued geopolitical turmoil and a potential decline in global gross domestic product (GDP).

The ratings company estimates dedicated capital at the end of the year may slip to $US435 billion ($624 billion) from $US475 billion ($682 billion) last year, when rising shareholders’ equity was driven by improved underwriting returns and strong equity market growth.

This year’s outlook still remains above the $US429 billion ($616 billion) in 2020.

Overall reinsurance capital may decline to $US530 billion ($761 billion) from $US568 billion ($815 billion), including a Guy Carpenter estimate for third-party capital to remain relatively stable at $US95 billion ($136 billion).

AM Best’s figure takes business classification allocations into account with the majority of reinsurance market participants now having primary insurance operations as well as third-party capital capabilities.

Market conditions for reinsurance in both the property and casualty lines, except workers compensation, continue to improve, leading to further rate rises and more favourable terms and conditions.

“Capital market volatility, however, has caused investment returns to deteriorate significantly compared with prior years, as declines in share prices and central bank discount rate increases have led to mostly unfavourable capital contributions from reinsurers’ investment portfolios,” the report says.

Global economies have struggled with supply chain issues and historically high inflation, including food and energy increases, leading to declines in GDP.

The report says despite hardening reinsurance market conditions, risk-adjusted capital requirements have increased, driven partly by the rise in required capital to support business that has experienced significant property catastrophe activity, commodity inflation, and social inflation.