By Max Dorfman, Research Writer, Triple-I
A recent AM Best report shows that traditional reinsurance capital will decline by about $40 billion by the end of 2022, bringing the total down to $435 billion. This 8.4 percent decrease comes after significant increases of 15.5 percent for 2019, 8.9 percent for 2020 and 10.7 percent in 2021. The figure includes the rise in the issuance market and the decline in the capital and investment markets, with continued geopolitical unrest and a possible decline in global GDP is also taken into account.
“With rising interest rates and declining equity markets, we expect a fairly significant mark-to-market loss in traditional reinsurance capital levels,” said Dan Hofmeister, senior financial analyst at AM Best. Reinsurance capital, which works in the opposite direction, has been boosted by underwriting results despite increased catastrophe loss activity in the first half of the year, he said.
Additionally, the report includes a 10-year record of third-party reinsurance capital levels and a prediction that total third-party capital will remain stable at around $95 billion for 2022 compared to $94 billion in 2021.
Combining traditional and third-party capital, the report predicts a 6.7 percent decline in reinsurance capital from both sources, which would represent the first decline in a decade, according to AM Best.
Florida is a symbol of these struggles
Declines in the US stock market have created capital supply challenges for some insurance-linked mutual funds. However, the AM Best report noted that the withdrawal of traditional reinsurance in catastrophe-prone markets such as Florida could create opportunities for Insurance-Linked Security (ILS) funds. The report notes that ILS funds could benefit from significant price increases and tighter terms, if traditional capacity is constrained.
Still, Florida continues to be a hotspot for property/casualty losses, with Triple-I finding that the state’s insurance market has suffered from severe levels of fraud and litigation, driving the homeowner’s insurance market crisis in the state. The analysis concluded that the annual cost of the average Florida home insurance policy could increase to $4,231 by 2022.
The reinsurance capital then accounts for a significant part of these costs that go to legal fees and adjustment companies. In addition, fraud related to roof replacements and other construction-related issues continues to increase the reinsurance bill in Florida.
“Floridians pay the highest homeowner insurance premiums in the nation for reasons that have little to do with their exposure to hurricanes,” said Sean Kevelighan, CEO of Triple-I.
With the threat of reduced capital for reinsurers and markets in places like Florida experiencing turmoil, reinsurers are actively reviewing their strategy.