Investor appetite to determine length of hard reinsurance market: AM Best

The appetite of investors to fund reinsurance strategies, be they traditional equity-backed reinsurers, or insurance-linked securities (ILS) structures, is a key determinant to how long the current hard market will last, AM Best has said.

Of course, there are other determinants, not least how the rest of the Atlantic hurricane season plays out, or whether any other major loss events, or macro-shocks occur.

But AM Best’s comments in recent reports, suggest the rating agency is not expecting an upwelling of appetite from investors particularly quickly, at least for areas of the market such as backing new reinsurance start-ups and the collateralized reinsurance and more private side of ILS.

On reinsurance start-ups, AM Best is not currently anticipating a new class of reinsurers to emerge this year, at least not in time for deployment of capacity by the key January 2024 renewals.

In addition, AM Best notes that while some traditional re/insurers have been raising capital, it is not strictly dedicated to reinsurance in many cases, so has not built sector capital considerably.

“How much capital will reenter the market outside of traditional underwriting earnings and investment gains is uncertain,” the rating agency said.

Also noting that, “New participants have been unable to raise capital despite strong business plans and management team support.”

By the end of the year, AM Best forecasts an increase of traditional reinsurance capital by 6.2%, while third-party or ILS capital is expected to grow by 3.1%.

But this is merely closing the gap that had been lost through the last year or so, or dented by the asset side effects experienced.

But the reinsurance market is looking as attractive as it has, as an investment prospect, for many years.

Which leads AM Best to say, “One may ask at what point the opportunity becomes too great to pass up.”

“At the moment, higher opportunity costs and risk-free rates are overwhelming the improved pricing opportunities in the market,” the rating agency continues.

Going on to say that, “The length of this hard market will likely depend on how quickly investor appetite changes for funding reinsurers.”

From what we’re hearing in the ILS market, capital raising is likely to continue for catastrophe bond fund strategies once that market’s issuance pipeline opens up again, which is expected to be later in the third-quarter.

We are also hearing positive noises from managers of private ILS fund strategies, with an expectation there will be capital flows in advance of the January reinsurance renewals.

While the cat bond market, therefore, seems likely to continue growing, on the collateralized ILS side it is more likely to be a case of further replenishment of assets, but still putting many managers on a better footing in advance of the key renewal contract signings for 2024.