We don’t expect a big inflow of new capital & companies: AM Best’s Carter

Rating agency AM Best is not anticipating any significant inflow of new capital or startup companies into the global reinsurance sector, at least not enough to derail the current hard market conditions, Greg Carter, Managing Director, Analytics – EMEA & Asia Pacific said today.

Speaking at the AM Best Europe Insurance Market Briefing this morning, Carter said that investors remain cautious and this applies to both traditional and alternative sides of reinsurance, and that perhaps, given recent historical performance, reinsurance is not as attractive as it was.

Carter explained that the rating agency sees no capital shortage in global reinsurance markets, rather he sees allocation and deployment of capital being more rigorously applied.

He called this “smarter allocation” of capital, adding, “If you look historically, at hard markets in the reinsurance world, it’s often been driven by capacity crunches and our view is that this this cycle is different.

“There is still plenty of capital in the industry is just a question of how that capital is being deployed.”

He said that, while AM Best uses the term “investor caution”, it’s perhaps more to do with “management caution”, adding that this is “in terms of how they’re allocating their capacity, and their appetite for risk currently.”

Overall, reinsurance remains very well capitalised and this gives the rating agency comfort, Carter said.

So, instead of being any deficiency of capital in reinsurance, the hard market is, in AM Best’s view, down to a “focus on producing a return that matches or exceeds the cost of capital has continued to drive the market at the markets discipline,” Carter said

“What we don’t see happening this time around is a new class of ’23 or ’24. We don’t think that the current market conditions will lead to a big inflow of new capital and new companies,” Carter went on to explain.

Further stating that, “There’s been quite a bit of talk, particularly in Monte Carlo, there was a couple of fairly high profile names from the industry associated with potential new startups. I think it’s possible that there will be new startups, but we do see investors being rather cautious about that opportunity.

“We’ve seen a number of business plans and management teams over the course of the last 18 months really, come to us with new business plans ideas as to how to enter the market. But we’ve seen very few actually able to raise capital and to launch those vehicles.”

AM Best, as a key rating agency for the reinsurance sector, would typically see the majority of start-up reinsurer business plans, as most target a rating.

So, if the rating agency is not anticipating a significant influx of reinsurer start-up capital, it’s relatively safe to assume that to be the case.

“If you look closely at the analysis of what sort of return investors are expecting, this is not an industry that has a great track record of producing those kinds of returns,” Carter said.

Given the low returns on equity delivered by the reinsurance sector in recent years, Carter went on to say that, “perhaps the attractiveness of reinsurance is not as great as it was five years ago.”

He reiterated, “We don’t see a significant number of new entrants. I don’t rule it out, but it’s not going to be sufficient new capital to drive the market. I think we will see the existing players continuing to expand their portfolios.”

On the insurance-linked securities (ILS) sector and alternative sources of reinsurance capital, Carter said that with almost all major reinsurance players leveraging third-party capital in some way, it’s “just become an accepted part of the industry, it’s become a part of the toolbox for effective capital management.”

Looking ahead to 2024, Carter said he would not be surprised to see these trends driving more firming of reinsurance rates.

Saying, “In terms of price, I think there is further upward pressure and I would expect to see, this is a forecast don’t hold me to this, modest single digit rises broadly across across the field.”