Despite a modest decline in the global reinsurance industry's weighted average cost of capital to 6.92% in 2022, some reinsurers continue to face challenges in meeting their cost of capital, testing investors' risk appetites, according to a new AM Best report.
The Best’s Market Segment Report, “Meeting Cost of Capital a Challenge for Some Reinsurers,” is part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo. Other reports, including AM Best’s annual ranking of the Top 50 global reinsurance groups and in-depth looks at the insurance-linked securities, Lloyd’s, life/annuity, health and regional reinsurance markets, will be available during August and September.
According to this report, reinsurers have seen a significant increase in the cost of debt, driven by rising interest rates, as well as the cost of equity due to stock market volatility. Catastrophe losses also have become more severe in recent years, with traditional catastrophic events and growing secondary perils plaguing the industry.
"Reinsurers did not meet the cost of capital in any of the past three years," said Helen Andersen, industry analyst, industry research and analytics, AM Best. "Reinsurers have been unable to meet their cost of equity since 2019 as well. Achieving hurdle rates will be difficult amid economic and social inflation, as well as escalating weather losses, despite significant price increases."
The reinsurance industry's weighted average cost of capital experienced a decline to 6.38% in 2019 from 9.44% in 2010, before spiking to 9.16% in 2021. Although it decreased in 2022, reinsurers are still struggling to generate returns above the cost of capital.
“Reinsurers that can effectively balance long-term strategies with tactical decisions and sound risk management still have the potential to meet, or even exceed, return expectations. This requires a comprehensive approach to navigating economic uncertainty and rising climate risk,” said Sridhar Manyem, director, industry research and analytics, AM Best.
As the reinsurance industry continues to grapple with these challenges, investors are closely monitoring the ability of reinsurers to generate returns above the cost of capital. The hardening market points to more-sustainable pricing momentum, which could help reinsurers meet their cost of capital over the medium term. However, economic and social inflation and the growing frequency and severity of weather events will increase uncertainty. Even as capital comes back cautiously in this environment, AM Best is not seeing substantial erosion of pricing conditions.
To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=335121.
A video discussion of this report also is available at http://www.ambest.com/v.asp?v=globalrecapital923.
For future global reinsurance reports ahead of Rendez-Vous de Septembre, please visit Best’s Research.
Lastly, AM Best will host its annual reinsurance market briefing at Rendez-Vous de Septembre on Sept. 10, 2023, at 10:15 a.m. (CEST) in Monte Carlo. For more information, please visit https://www.ambest.com/conference/rvds2023/index.html.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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