Consolidation among reinsurers ‘more likely than new formations’

Reinsurer consolidation is more likely than the emergence of a new class of start-ups, analysts at AM Best said.

Potential start-ups would face “scepticism” from investors, given the current elevated risk premiums owing to the sector’s volatile results of recent years.

In contrast, incumbent carriers with a proven track record are in the best position to raise capital if necessary, the rating agency said.

In recent months, major reinsurance groups have raised capital to take advantage of hard market conditions, including Everest Re and RenaissanceRe – the latter is in the process of acquiring Validus Re from AIG.

But there has been no meaningful new capital coming into the market from start-up firms, the analysts said.

Overall, the sector’s capitalisation level has fallen, mainly due to realised losses on fixed income portfolios.

AM Best estimates the top 25 global insurance groups suffered a 17% decline in shareholders’ equity last year.

For the sector overall, AM Best has calculated traditional capital levels have fallen to $411bn in 2022 from $475bn in 2021.

But despite this decline, the sector remains well capitalised, according to the rating agency. Traditional capital is expected to recover to $461bn in 2023.

Recognising the difference between “available” and “deployed” capital was crucial, AM Best said.

Available capital is not under pressure, the rating agency said, with the largest reinsurance groups either holding considerable “dry powder” or being very well positioned to raise capital without much difficulty.

However, those well-capitalised players have become “much more selective” in allocating their capital, which pressures the deployment of capacity, the analysts said.

Given reinsurers’ prudent approach to deploying capital, companies are likely to preserve underwriting discipline for a longer period than in previous cycles, AM Best said.

But market participants are under pressure to innovate, expand their presence and assert their role in an evolving economy in which today’s emerging risks will soon become the dominant ones.

AM Best said its stable outlook on the global reinsurance segment reflects this balancing act between positive and negative factors.

“Investors will likely demand a strong commitment to underwriting discipline, as well as flexibility to adjust to changing conditions in the business cycle,” Carlos Wong-Fupuy, senior director at AM Best, said.

“Well-established, diversified companies with a proven track record are better positioned to succeed in this effort than start-ups that are pressured to meet top-line targets.”