Hard reinsurance market not going away – AM Best

The reinsurance industry is currently experiencing a hard market, generating risk-adjusted returns not seen since 1993, according to a report by AM Best.

This cyclical shift, often triggered by significant underwriting losses and surplus erosion, has improved prospects for many reinsurers. Typically, a large-scale loss initiates the transition from soft to hard pricing cycles, attracting investors eager to benefit from hardening underwriting conditions and resulting in the formation of startup reinsurers.

According to insights from the credit agency, these new entities often merge or are acquired as the market eventually softens and supply-demand equilibrium is restored.

Historical events such as the great fire of Glarus (1861), Hurricanes Hugo (1989), Andrew (1992), and Ike (2008), as well as September 11 and the 2005 hurricane trio Katrina, Rita, and Wilma, have marked shifts in the reinsurance market. Traditionally, these events led to the formation of reinsurers that became market leaders.

However, the current hard market, which began around 2017, has not seen the same emergence of new reinsurers, AM Best noted.

Since 2017, elevated property catastrophe activity and an increase in secondary perils have driven improvements in reinsurance pricing and contract terms, according to the firm. Despite a decelerating rate, these trends continued through the June 1, 2024, renewal. Rising interest rates in 2022 caused capital market volatility, leading to mark-to-market losses that significantly reduced available capital in the industry.

While these capital losses were seen as temporary, the need for higher underwriting income to compensate for increased risks led to a chaotic reinsurance market. A widening gap between the expectations of reinsurance sellers and buyers has resulted in a persistent hard market, expected to continue through at least 2025, AM Best reported.

What makes this hard market different?

This hard market differs from previous ones as it was not caused by a single large loss but by a series of property catastrophe events leading to significant underwriting losses. From 2017 to 2021, low-interest rates resulted in an abundance of capital, prompting reinsurers to push for business growth, driving down margins and attachment points.

The situation shifted in 2022 when rising interest rates forced the industry to reevaluate underwriting positions, leading to substantial mark-to-market losses on reinsurers’ balance sheets. These losses were generally viewed as temporary due to the short duration of fixed-income investment portfolios, AM Best noted.

Despite the prolonged hard market and significant shifts in market conditions, no new reinsurers have been formed to capitalize on the opportunities. Several high-profile management teams announced intentions to create new reinsurers, and many more were rumored to be seeking funding. However, none have progressed beyond the fundraising stage, according to AM Best.

The current hard market is expected to persist for several years, with pricing and conditions unlikely to soften soon. The industry continues to navigate the challenges posed by increased catastrophe activity and changing financial conditions.

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