The reinsurance industry’s robust earnings and abundant capital, evident since 2023, have led to increasing competition and a softening market.
“The key question is whether reinsurers can maintain underwriting discipline or will irrational competition emerge, leading to another traditional soft market cycle,” said AM Best.
The ratings agency says the “question is hardly a new one,” given the experience of reinsurance cycles over many years.
“The next 12 months may ultimately determine whether the market is entering a new era of sustained underwriting discipline or continuing down the path of yet another traditional soft market cycle,” said AM Best in its report titled “Global Reinsurance at an Inflection Point: Can Discipline Survive the Temptation of Record Capital?“, published on Aug. 10.
If reinsurers can maintain underwriting discipline and pricing integrity despite record levels of capital, there may be a new market paradigm at work, AM Best indicated. However, time will tell whether the market can buck age-old trends.
“If not, history may once again demonstrate that while market structures change, the fundamental dynamics of supply, demand, and competition remain remarkably persistent,” the report said.
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Permanent Structural Changes?
“Throughout the past two decades, the reinsurance industry has repeatedly debated whether structural changes would permanently alter the traditional underwriting cycle,” said the ratings agency.
However, the resolve to maintain underwriting discipline ultimately faltered for many reinsurers in the face of market competition.
AM Best cited the example of the so-called Bermuda “Class of 2005,” when reinsurers formed in the wake of hurricanes Katrina, Rita, and Wilma. At that time, “market participants questioned whether increasingly sophisticated catastrophe models, improved risk management practices, and new forms of capital would dampen the severity of future underwriting cycles,” said the report.
“Similar discussions emerged during the rapid growth of insurance-linked securities (ILS) and third-party capital in the years following the global financial crisis,” it continued.
“While each period introduced meaningful changes, history ultimately demonstrated that cycles remained present, albeit in evolving forms,” AM Best said.
Few New Reinsurers
The current soft/softening markets has some marked differences from cycles of the past, indicated the ratings agency.
“Unlike prior hard markets, the industry has not experienced a significant influx of newly formed reinsurers seeking market share by underpricing business,” the report said.