AM Best warns record reinsurance capital invites the next soft market

AM Best calls it a "critical inflection point." In a special market segment report covered by The Royal Gazette, the rating agency warns that record capital built up during the recent hard markets has brought global reinsurance to a test it does not often pass. Can the industry keep the discipline that produced its profitable results, or will "irrational competition" appear and push it into another traditional soft market cycle?

The report, "Global Reinsurance at an Inflection Point: Can Discipline Survive the Temptation of Record Capital?", is the opening piece of AM Best's annual review ahead of the Rendez-Vous de Septembre in Monte Carlo. Rankings of the largest global reinsurance groups and deeper reports on insurance-linked securities, Lloyd's, life/annuity, health, and regional reinsurance will follow in the coming weeks. It also recounts a fast repair. Bermuda and U.S. reinsurers were in an underwriting loss position in 2020. They moved to combined ratios in the mid-80s to low-90s under U.S. GAAP. The European Big Four, reporting on an IFRS 17 basis, have followed a similar trend.

Something did not happen this cycle. Unlike earlier hard markets, fresh capacity did not arrive through a wave of new entrants. AM Best says capital has accumulated inside existing organizations. A reinsurer that already holds capital has many places to put it and less need to grow through single-channel underwriting.

For the ILS market, the finding reads as a warning. With capital already sitting on incumbent balance sheets, there is less need to draw capacity in from outside. AM Best already notes growing competition in property lines, and pricing pressure is likely to appear first in the most liquid, easiest-to-deploy capacity — the collateralized corner of the market.

The report puts casualty reinsurance among the industry's most important strategic concerns. AM Best sees two camps. Some organizations are using enhanced casualty rates to build overall group premium and revenue; others are cautious in the face of social inflation, litigation funding, larger jury awards, and an escalating adverse legal environment.

Dan Hofmeister, a director at AM Best, puts the problem in calendar terms. Casualty exposures develop over many years, he says, so decisions made today may not be fully understood until well into the next decade. He adds that maintaining pricing discipline in casualty may ultimately prove as important as preserving capital.

The casualty clock runs longer than the pricing cycle. Rate cuts written this year will show up in claims long after the people who set them have moved on. Record capital gives every incumbent the option to wait out soft pricing or to cut into it. Both camps cannot be right.