The Decline of Traditional Reinsurance Capital: A Comprehensive Analysis

The Decline of Traditional Reinsurance Capital

A recent AM Best report finds that traditional reinsurance capital will decrease by approximately $40 billion by the end of 2022, lowering the total to $435 billion. This 8.4 percent decline comes after substantial increases of 15.5 percent for 2019, 8.9 percent for 2020, and 10.7 percent in 2021. The figure incorporates the upturn of the underwriting market and the downturn of the capital and investment markets, with continued geopolitical unrest and the possible decline in global GDP also considered.

Impact on Third-Party Reinsurance Capital

Additionally, the report includes a 10-year record of third-party reinsurance capital levels and a prediction that overall third-party capital will remain stable at approximately $95 billion for 2022 compared to $94 billion in 2021. With traditional and third-party capital together, the report predicts a 6.7 percent decrease in reinsurance capital from both sources, which would constitute the first decline in a decade, as recorded by AM Best.

Florida: A Case Study in Reinsurance Challenges

Declines in the U.S. equity market have created capital supply challenges for some insurance-linked securities funds. However, the AM Best report stated that the pullback of traditional reinsurance in catastrophe-exposed markets like Florida could create opportunities for Insurance-Linked Security (ILS) funds. The report states that ILS funds can take advantage of significant price increases and tighter terms and conditions, if traditional capacity is restricted.