A strong focus on profit margins experienced over the recent past, which is expected to be sustainable in the short to medium term, has been the main driver of the AM Best’s positive outlook on the worldwide reinsurance market.
Concerns persist about the performance of legacy casualty reserves, especially accident years 2016 through 2019, and volatility due to climate risk and the economic and geopolitical environment.
AM Best described the conditions that led the rating agency to change its reinsurance market outlook to positive from stable, its first-ever outlook upgrade for the market, according to 2024 Global Reinsurance Market Highlights: Reinsurer Revenue & Capital Growth.
Global reinsurance market delivered strong results in the first half of 2024 with further improvement in underwriting profitability, exceptional ROEs and a continued building of capital. Earnings resilience has further increased through a higher underlying ROE which provides reinsurers with additional buffer to absorb headwinds.
Over the past year, reinsurers have seen pricing climb back to levels not seen since 2006. At the same time, interest rates recovered somewhat from historic lows
Carlos Wong-Fupuy, senior director, global reinsurance ratings AM Best
These conditions allowed the reinsurance market to stabilize at a higher point, which should remain for several years.
Positive reinsurance market outlook
The positive reinsurance market outlook comes from de-risking as much as pricing with changes in terms and conditions, rising attachment points and tightening of wording — factors which are as important as price increases, making margins sustainable in the short to medium term.
AM Best doesn’t see disruptors coming into the market. There was a lack of new entrants in the reinsurance market despite improved conditions, suggesting a more disciplined approach from investors. While capital is available, it has become more efficient.
There is rising demand for more complex and emerging risks such as cyber and artificial intelligence.
The rising demand for complex risks moved reinsurers away from risks such as reinsuring secondary perils or providing income statement protection
Stefan Holzberger, senior managing director and CRO AM Best
The expertise and risk appetite are there, but he said the appetite for increasing volatility combined with increasing frequency is not in the market today.
A strategic reinsurance market reset by global reinsurers has led to strong technical profits and altered industry dynamics, according to AM Best’s Market Report.
New reinsurers’ focus on complex risks
There was a shift in reinsurers’ focus on complex risks such as cyber and emerging technologies and away from more volatile, frequent losses.
Interest rates are beginning to decline again this year, and that could foreshadow loosening monetary policy which for the reinsurance market could mean excess capital, lower rates and increased competition.
That’s potentially not a good thing for the industry.
Geopolitically, worldwide tensions are not easing, and the U.S. elections this year could have an effect. The increase in the underlying underwriting margin is driven by the meaningful improvement in underlying combined ratio. The underlying underwriting margin increased from 2.7% a year ago to 3.9%.
Mid-year reinsurance renewals have further consolidated the positive trends at 1/1 and 4/1, setting the stage for a more competitive reinsurance market in 2025.
Reinsurers price to book value ratios are reaching a peak, prompting speculation about mergers and acquisitions activity. There isn’t a strong indication of M&A, given the interest rate cycle and the relative cost of capital for insurers versus other industries as well as organic growth opportunities.
Trends in casualty reinsurance and reserve developments
AM Best is watching trends in casualty reinsurance and reserve developments, particularly in U.S. casualty books. It is a concern for reinsurers but as of now concentrated in the United States. There has been softening in some pockets but overall casualty lines worldwide are holding up.
Reinsurance rate increases for property catastrophe business are likely to slow to below 10% on average when contracts are renewed in January 2024. Improvements in underwriting margins will therefore be less significant than in 2023.
Price increases, and better terms and conditions in 2023, and to a lesser degree in 2024, will continue to support underwriting margins. Normalised for major losses, we expect margins to peak in 2024.
We believe that there’s sufficient healthy, margins, given the good profitability that we heard about before and also the dividend payouts that we’ve seen
Angela Yeo, senior director and head of analytics and operations, Amsterdam
Given the comprehensive de-risking measures and a realignment of interests between reinsurers and primary carriers, along with a lack of new company formations, AM Best expects the hard pricing conditions to last longer than in previous cycles.
Non-life alternative capital grew by $6 bn (+5.6%) to $113 bn, driven by higher earnings and capital inflows, particularly in catastrophe bond mandates (see Global Reinsurance Capital & Catastrophe Bond Market Dynamics).
Reinsurance operating results were strong in 2023 and remain so going into 2024. Companies have generated sufficient profit to cover their cost of capital last year and so far this year.
Global Reinsurance – FRS 4 and IFRS 17 Comparison Data
| Metric | FRS 4 2022 | IFRS 17 2022 | IFRS 17 2023 |
| Net Written Premium (P&C only) | 15.9 | nan | 12.1 |
| Net Earned Premium (P&C only) | 16.1 | nan | nan |
| Total Revenue | 2.1 | nan | 13.4 |
| Shareholders’ Equity (End of Period) | -34.2 | nan | 13.6 |
| Loss Ratio | 69.7 | nan | nan |
| Expense Ratio | 29.2 | nan | nan |
| Combined Ratio | 98.9 | 90.8 | 87.0 |
| Reserve Development (Favourable/Unfavourable) | -2.2 | -4.2 | -3.5 |
| Net Investment Ratio | 8.6 | 8.2 | 13.7 |
| Operating Ratio | 90.3 | 82.6 | 73.3 |
| Return on Equity | 10.5 | 10.3 | 18.6 |
| Return on Revenue | 3.8 | 4.8 | 6.7 |
| Net Written Premium (P/C only) to Equity (End of Period) | 204.3 | 130.8 | 129.1 |
| Net Reserves to Equity (End of Period) | 795.1 | 640.0 | 610.8 |
| Gross Reserves to Equity (End of Period) | 837.3 | 667.0 | 628.4 |
IFRS 17 adopted by many reinsurers
At the same time, IFRS 17, which became effective on Jan. 1, 2023, has been adopted by many reinsurers, and this move has created challenges for users of the new financial standard as they adjust to its provisions. This change also has prompted AM Best to modify its listing of the largest reinsurers, depending on the reporting standard used.
The difference between written premiums under the old standard and reinsurance revenue under IFRS 17 doesn’t allow for direct comparison. Reinsurance combined ratios are somewhat different, with IFRS 17 combined ratios discounted.
The IFRS 17 requirements could result in accounting mismatches and volatilities in profit and loss—a direct consequence of the insurer’s reinsurance management strategy and contracts entered into today.
IFRS 17 is the newest IFRS standard for insurance contracts and replaces IFRS 4 on January 1st 2022. It states which insurance contracts items should by on the balance and the profit and loss account of an insurance company, how to measure these items and how to present and disclose this information.
With IFRS 17’s anticipated mandatory effective date of 1 January 2023 moving ever closer, all types of businesses, not just registered insurance businesses, need to start evaluating the impact of the Standard now.
Life reinsurance has been doing well
Life reinsurance has been doing well as four or five large players have dominated the life reinsurance market. On the annuity side, he said the large U.S. market has just been a lot of that business going into the reinsurance market. A number of new reinsurers were formed in offshore domiciles.
New insurers were formed with private equity backing, as well as asset managers who receive fees and commissions for originating assets, then moving those assets into their reinsurance subsidiaries with the risk moving offshore into the reinsurance segment.
More private assets are moving into insurance and reinsurance, making valuations a bit harder and liquidity testing more important.
European life reinsurers had improved performance results in 2023, benefiting from lower COVID-19-related deaths, but there is some excess mortality for U.S. books.
Some reinsurance companies were already retreating from the property-casualty insurance market but even the strongest reinsurers have now pulled back, largely through tightening their terms and conditions to limit their aggregate covers and low layers of natural catastrophe protection (see Global Insured Losses from Natural Catastrophes: Perspective & Trends).
The reinsurance capital decline was primarily attributed to unrealised investment losses on fixed-income holdings, which comprise over 60% of the average investment portfolio. Although equity holdings were also impacted, constituting less than 8% of the portfolio, they have shown partial recovery in 2023.
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AUTHORS: Carlos Wong-Fupuy – senior director, global reinsurance ratings AM Best, Stefan Holzberger – senior managing director and chief rating officer AM Best, Greg Carter – managing director, AM Best Europe, Middle East, Africa and Asia-Pacific, Angela Yeo – senior director and head of analytics and operations, AM Best Amsterdam, Mahesh Mistry – senior director and head of analytics, AM Best London
