Amid highly uncertain market conditions, rating agency AM Best said it was maintaining a stable outlook on the global reinsurance industry because there were counterbalancing positive and negative factors.

Negative drivers for the industry include the geopolitical and economic uncertainty on top of the investor risk tolerance levels already being tested by the heightened natural catastrophe activity.

Best’s Market Segment Outlook on global reinsurance said negative pressures on reinsurers’ results over the past few years had been driven not only by traditional natural catastrophe events, but also by the growth of secondary perils, the pandemic, and, more recently, the Ukraine-Russia conflict.

“This has been compounded by financial, economic, social, and geopolitical uncertainty in general,” the report said.

Much like with insurance-linked securities, new capital remains timid to insurance investment. The interest rate environment and the investment market volatility have dampened shareholders’ equity on a market value basis.

Pressure from inflation and the forecast recession was unlikely to improve profitability targets over the long term and could make them worse, the rating agency said.

But positively, improved pricing momentum and enhanced market discipline continue, including tighter terms and conditions. There remains a growing demand for reinsurance capacity as primary carriers look for stable results and capital efficiency in an uncertain environment.

The move by many reinsurers to reduce their property cat exposures or diversify their mix, is stabilising their results.

Hardening cycles normally include a material impact on market conditions from the new capital, but not so much today. Investors have been far more cautious. Even third-party capital has been subject to the same level of scepticism.

While there has been higher demand and improved pricing, claims volatility remains the key issue. Concerns about trapped capital are still evident. There remains investor worries about loss creep – increasing loss estimates and reported losses from previous loss events, such as large hurricanes.

The report continued: “Will the 2023 renewals mark a turning point for a true hardening market able to attract new capital in droves and expand supply?

“Will third-party capital providers move first, as they have in previous cycles, taking advantage of the current retrenchment from traditional players and driving a new softening trend?

“Trying to predict the future is even more complicated nowadays, because how the year-end renewals go will depend heavily on actual claims activity and on where the global economy goes.

“Given the elevated catastrophe activity experienced this year, asset market volatility, continued geopolitical angst, inflationary pressures and recession fears, uncertainty could remain so high that few investors will feel comfortable deploying capital regardless of the price. A few new entrants will still try, but their impact is likely to be limited in a market in which rates could continue to rise in response to more limited dedicated capacity.

“The importance of property cat risks and cyber is likely to continue to grow even further, in a world exposed to worrying climate trends and expanding digitisation. Robust modelling, adequate pricing, and strong risk management tools for both risk categories remain a clear challenge.

“They are essential for (re)insurers to feel comfortable with their pricing and risk selection – even to determine what they consider insurable or not.

“In the short term, exiting certain risks and restricting covers may be justified and likely the only course of action.

“Long term, however, if the reinsurance segment does not develop more innovative solutions, its role and its relevance to the broader economy may be dramatically diminished.”