Best’s Market Segment Special Report: Dedicated Reinsurance Capital Growth of 2021 May Not Continue

Dedicated reinsurance capacity in 2021 increased to $568 billion, driven by an increase of nearly 11% from traditional reinsurance capacity providers. However, according to a new AM Best report, the spike may be short-lived given expectations for depressed investment markets, continued geopolitical turmoil and a potential decline in global gross domestic product.

The new Best’s Market Segment Report, “Dedicated Reinsurance Capital Growth of 2021 May Not Continue,” is part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo. According to this report, the expectation for 2022 is that total dedicated capital will slide back after a decade of year-over-year increases, driven by reductions in traditional reinsurance capital. Although underwriting returns for many companies have been close to break even in recent years, capital levels grew through investment gains and inexpensive debt financing; the start of 2022 has seen a reversal of most of these conditions.

“Although AM Best expects headwinds in the capital and investment markets to continue in 2022, dragging down traditional capital levels, some of these losses likely will be offset by underwriting gains,” said Dan Hofmeister, senior financial analyst, AM Best. “The historical lack of a strong correlation between underwriting and asset returns may indicate relatively flat capital levels, but the repeat of a severe property catastrophe season in 2022 could prove to be adverse for reinsurers.”

The report notes that many reinsurers substantially decreased property exposure through the last renewal cycle. Those still exposed to material amounts of multiyear reinsurance contracts or did not manage risk exposures prudently could be exposed to material capital deterioration should they suffer underwriting losses, especially if coupled with adverse investment market returns in 2022.

On the third-party reinsurance capacity side, the pullback of traditional reinsurance in catastrophe-exposed markets such as Florida has created opportunities for insurance-linked securities (ILS) funds. By taking advantage of the lack of capacity, some ILS funds have been able to capitalize on not only significant price increases, but also on tighter terms and conditions. AM Best works in conjunction with Guy Carpenter to estimate the total amount of capital supporting the reinsurance industry. AM Best determines traditional reinsurance capital; Guy Carpenter determines third-party capital.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=323156.

A short video interview about this report also can be viewed at http://www.ambest.com/v.asp?v=dedicatedcapital922.

Additional reports, including AM Best’s annual ranking of the Top 50 global reinsurance groups and in-depth looks at the insurance-linked securities, Lloyd’s, life reinsurance, mortgage and regional reinsurance markets, will be available during August and September leading up to Rendez-Vous de Septembre. Please visit Best’s Research for other reinsurance-related reports.

Lastly, AM Best will host its annual reinsurance market briefing at Rendez-Vous de Septembre on 11 September at 10:15 a.m. (CEST), at the Hermitage Hotel in Monte Carlo. For more information, please visit http://www.ambest.com/conferences/rmbrvs2022/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 New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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