Dedicated Reinsurance Capital Growth Seen in 2021 Might Not Continue

A green arrow showing a gradual rise and a red arrow showing a rise and then a sharp fall

August 24, 2022 |

A green arrow showing a gradual rise and a red arrow showing a rise and then a sharp fall

Dedicated reinsurance capacity increased to $568 billion in 2021, though that capacity growth might not continue, according to A.M. Best.

Last year's growth in reinsurance capacity was driven by an increase of nearly 11 percent from traditional reinsurance capacity providers, according to a Best's Market Segment Report, "Dedicated Reinsurance Capital Growth of 2021 May Not Continue."

The rating agency suggested that expectations for depressed investment markets, ongoing geopolitical turmoil, and a potential decline in gross domestic growth might stifle that capacity growth, however.

According to Best's report, the expectation for 2022 is that total dedicated reinsurance capital will slide back after a decade of year-over-year increases as a result of reductions in traditional reinsurance capital. Best noted that while underwriting returns for many reinsurance companies have been close to breaking even in recent years, the companies' capital levels grew through investment gains and inexpensive debt financing. Thus far, 2022 has seen a reversal of most of those conditions, Best said.

"Although A.M. 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," Dan Hofmeister, senior financial analyst at A.M. Best, said in a statement. "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 Best report notes that many reinsurers made efforts to reduce their property exposures at the last renewal cycle and that the retreat of those traditional reinsurance companies from catastrophe-exposed markets like 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 take advantage of price increases and tighter terms and conditions, Best said.

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August 24, 2022