Hard market enables reinsurers to meet cost of capital

Reinsurers met the cost of capital for the first time in four years in 2023 as the hard market drove profits up, AM Best has revealed in a new study. 

The report said positive underwriting results, driven by repricing and portfolio de-risking, led to the improved return. 

The reinsurance industry’s median weighted average cost of capital rose in 2023 to 8.12%, representing the first time in four years that the reinsurance industry had met their cost of capital, AM Best said. Between 2011-2021, the largest median percentage posted was 9.31% in 2021; the industry’s median weighted average cost of capital in 2022 was 7.35%. At the same time, the industry’s return on equity reached a 12-year high in 2023.

“The hardened market has led to more sustainable pricing momentum, enhancing reinsurers’ ability to meet their cost of capital over the medium term,” said Sridhar Manyem, senior director, Industry Research and Analytics, AM Best.

The ratings agency said reinsurers look to optimise their cost of capital and maximize their returns while taking risks commensurate with their risk appetites. Significant and unexpected volatility in returns can indicate inefficiencies with regards to managing risk, resulting in a higher cost of capital. During the prolonged low interest rate environment, investors’ interest in reinsurance through traditional equity, third-party capital and insurance-linked securities (ILS) grew, as investors diversified their portfolios.

"Reinsurers’ failure to meet their cost of capital consistently in recent years has tested investors’ risk appetite,” said Helen Andersen, industry analyst, AM Best.

The Segment Report, “Reinsurers Meet Cost of Capital for First Time in Four Years”, can be accessed at ambest.com  

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