Hesitant capital remains sidelined despite rating improvements - AM best

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 AM Best.

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 favourable play for reinsurers.

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, notes the rating agency. 

‘Wait and see’ approach

That cost of capital is due to increase even further, according to 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 capitalised, it’s important to note how capital is being deployed and that significant amounts remain on the sidelines.”

Wong-Fupuy was joined on a recent panel by Somers Re CEO Liz Cunningham and Aditya Dutt, president of Aeolus Capital Management. Cunningham said property writers experienced the heaviest hit at the 1 January 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 stabilised enough to persuade new investors and capital to enter the market.