Return-on-Equity, Cost of Capital Gap Driving Reinsurance Prices Higher
February 01, 2023
A persistent gap between return-on-equity ratios and the overall cost of capital is a key factor in higher reinsurance prices, according to A.M. Best.
In a Best's Market Segment Report, titled "Hesitant Capital Had Looming Role at January 1 Reinsurance Renewals," the rating agency noted that persistently high loss levels and volatility from small and medium-sized natural catastrophes have combined with increasing inflation and geopolitical issues to make property catastrophe exposures less favorable for reinsurers.
Best estimated that the reinsurance segment has been generating return-on-equity ratios of approximately 4 to 5 percent, while the cost of capital in the market is at least twice that and expected to increase further.
The new Best report is based on a briefing in which a panel of A.M. Best analysts and industry executives discussed pricing pressures at January renewals.
"Despite improving pricing trends and tighter terms and conditions, new capital is taking a very cautious approach," Carlos Wong-Fupuy, senior director at A.M. Best and one of the panelists, said. "While the market remains well capitalized, it's important to note how capital is being deployed and that significant amounts remain on the sidelines."
Another panelist, Liz Cunningham, CEO of Somers Re, said property insurers had the most difficult experience at January 1 reinsurance renewals, with catastrophe-exposed lines facing 50 to 100 percent price increases.
Aditya Dutt, president of Aeolus Capital Management, who also participated in the panel, said some factors influencing the flow of capital into reinsurance are beyond the sector's control, such as rapid interest rate changes and the fall in value of equity markets.
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February 01, 2023