Best’s Market Segment Report: Hesitant Capital Remains Sidelined Amid Property Catastrophe Losses and Higher Inflation

OLDWICK, N.J.--(BUSINESS WIRE)--The ongoing gap between return-on-equity ratios and the overall cost of capital is one of the key drivers for higher reinsurance prices going forward, according to a new AM Best report capturing the views of panelists from a recent reinsurance industry briefing.

The Best’s Market Segment Report, “Hesitant Capital Had Looming Role at January 1 Reinsurance Renewals,” is based on a briefing earlier this week in which a panel of AM Best analysts and industry executives discussed pricing pressures around the Jan. 1, 2023, reinsurance renewal season.

Persistently high levels of losses and volatility from small and medium-sized natural catastrophes, coupled with rising inflation and geopolitical concerns, has made property catastrophe exposures a less favorable play for reinsurers. By AM Best’s estimates, the reinsurance segment has been generating return-on-equity ratios of approximately 4-5%, in a market where the cost of capital is at least twice that. That cost of capital is due to increase even further, according to one of the panelists, Carlos Wong-Fupuy, senior director, AM Best.

“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 capitalized, it’s important to note how capital is being deployed and that significant amounts remain on the sidelines.”

Wong-Fupuy was joined on the panel by Somers Re CEO Liz Cunningham and Aditya Dutt, president of Aeolus Capital Management. Cunningham said property writers experienced the heaviest hit at Jan. 1 renewals, with catastrophe-exposed lines up 50-100% generally. Dutt said some factors influencing the capital inflow are beyond the sector’s control, such as the rapid interest rate changes and the estimated 20% drop-off in equity markets, all within the past 12 months alone. He cited the difference in economic conditions relative to the past 30 years coupled with the increased incidence of large catastrophe events.

Additional topics of discussion included the future role of insurance-linked securities in underwriting property catastrophe exposures, the impact of economic instability on market conditions and whether reinsurance pricing and results have stabilized enough to persuade new investors and capital to enter the market. AM Best maintains a stable outlook on the global reinsurance segment.

To access the full copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=328290.

To view the complimentary briefing, please go to http://www.ambest.com/conferences/reinsurance2023/index.html.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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