The recent hard market periods that strengthened reinsurance capital to record levels could bring negative consequences, rating agency AM Best has warned in a special report.

The unprecedented capital has pushed the global reinsurance market to a “critical inflection point”, Best said in its market segment report.

There will be a question, the report suggests as to whether reinsurers can maintain the discipline that produced profitable results.

Bermuda and US reinsurers have seen combined ratios improve to the mid-80s to low-90s range (under US GAAP) from an underwriting loss position in 2020. The European “Big Four” reinsurers’ (reporting on an IFRS 17 basis) combined ratios have followed a similar trend.

The analysis said growing competition was increasing pressure on reinsurance pricing, particularly in property lines, raising a key question as to whether reinsurers could maintain underwriting discipline “or will irrational competition emerge, leading to another traditional soft market cycle”.

The report, entitled Global Reinsurance at an Inflection Point: Can Discipline Survive the Temptation of Record Capital?, is an early part of the rating agency’s review of the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo.

Other reports, including AM Best’s ranking of top global reinsurance groups and in-depth looks at the insurance-linked securities, Lloyd’s, life/annuity, health and regional reinsurance markets, will be available in weeks ahead.

The rating agency said: “The global non-life reinsurance segment continues to benefit from strong capitalisation, favourable earnings generation and supportive market conditions.

“However, unlike previous hard markets, capital among these reinsurers has largely accumulated within existing organisations rather than through a wave of new entrants.

“Many reinsurers now possess multiple opportunities through which capital can be deployed, reducing the need to pursue growth solely through single-channel reinsurance underwriting.”

The report argues that casualty reinsurance increasingly represents one of the industry’s most important strategic concerns.

It said: “Some organisations are capitalising on casualty growth opportunities, given enhanced rates to bolster overall group premium and revenue, while others have adopted a more-cautious approach given heightened uncertainty surrounding social inflation, litigation funding, larger jury awards and escalating adverse legal environments.

Dan Hofmeister, director, AM Best, noted: “Casualty exposures often develop over many years, meaning that decisions being made today may not be fully understood until well into the next decade.

“Consequently, maintaining pricing discipline in casualty business may ultimately prove as important as preserving discipline within the property catastrophe market.”

The rating agency expects the non-life reinsurance market to maintain favourable earnings profiles barring an outsize catastrophe event.

But it says a more important question is whether reinsurers can preserve the discipline that produced these profitable results of recent years.

Michael Lagomarsino, senior director, AM Best, said: “If underwriting discipline and pricing integrity can be maintained despite record levels of capital, the industry may indeed be in the midst of a meaningful evolution of the reinsurance market. If not, history may once again demonstrate that the fundamental dynamics of supply, demand and competition remain remarkably persistent.”

The report discusses how reinsurance renewal trends, which marked a decisive turn in January, intensified further at the April and midyear renewals, where US property catastrophe placements, led by Florida, saw reductions widely estimated at 15 per cent to 20 per cent.

The report added: “The budding casualty insurance-linked securities market is a relatively small portion of the overall alternative capital market, but investor interest in casualty-linked structures continues to grow. However, the attractiveness of property catastrophe ILS has proven difficult to replicate within casualty business.

“For many of the large global reinsurers, life reinsurance provides relatively stable earnings streams that can help offset volatility elsewhere within the business portfolio.”