The ratings agency said reinsurers were facing “severe volatility” because of weather events and inflation, whilst rising interest rates have elevated the cost of debt.
However, AM Best said the hard market in reinsurance could help reinsurers meet the cost of capital over the medium term.
“The hardening market points to somewhat more sustainable pricing momentum, which could help reinsurers meet their cost of capital over the medium term,” the report said.
“However, economic and social inflation and the growing frequency and severity of weather events will worsen the uncertainty.”
AM Best said the weighted average cost of capital decreased from 9.44% in 2010 to 6.38% in 2019, before spiking to 9.16% in 2021.
“It declined again in 2022, but reinsurers are still struggling to generate returns above the cost of capital due to economic uncertainty, as well as rising climate risk, and economic and social inflation,” the report said.
AM Best said catastrophe losses had become more severe in recent years, and that growing secondary perils “plague the industry”.
A low-interest environment in previous years attracted investors to traditional reinsurance equity, third-party capital and ILS, but a failure to meet cost of capital consistently has dampened investor appetite.
