AM Best special report tags top reinsurance pricing drivers

Small and medium-sized natural catastrophes have produced high levels of loss and volatility. These, coupled with rising inflation and persisting geopolitical concerns, made property catastrophe exposure a “less favourable play” for reinsurers, AM Best said in its special report. Reinsurance thus generated an estimated return-on-equity of just 4% to 5%, when the cost of capital cost was twice that.

Somers Re CEO Liz Cunningham – one of the reinsurance experts interviewed in AM Best’s special report – said property writers were the worst hit at the January 1 renewal period, with catastrophe-exposed lines up by as much as 50% to 100%.

AM Best senior director Carlos Wong-Fupuy also sat among the panel of experts for the special report and predicted that the cost of capital was set to increase even further.

“Despite improving pricing trends and tighter terms and conditions, new capital is taking a very cautious approach,” Wong-Fupuy said. “While the market remains well capitalised, it’s important to note how capital is being deployed and that significant amounts remain on the sidelines.”

Aeolus Capital Management president Aditya Dutt added that the factors driving the capital inflow were sometimes beyond control. The steepness of the consecutive interest rate hikes and the 20% drop-off in equity markets in the past year alone was something the reinsurance sector could not have predicted, he said. Dutt also noted the higher large-catastrophe incidence today and the difference in market conditions compared to the past three decades.

The special report likewise touched on the future role of insurance-related securities in the underwriting of property catastrophe exposure and the relationship between economic instability and the reinsurance market conditions. It contained reinsurance experts’ takes on whether the current reinsurance pricing and results would be enough to convince new investors to enter the market and to inject new capital into the system.