Reinsurance is in a stable place right now despite some major challenges, according to Tony Diodato, ratings agency AM Best’s managing director of reinsurance.

Speaking at AM Best’s Insurance Market Briefing and Networking Reception at the Hamilton Princess & Beach Club on Tuesday, Mr Diodato gave a rundown on the global reinsurance industry.

“Traditional reinsurance and ILS have had a partnership for a very long time,” Mr Diodato said. “There was a void in the market. Retro was needed and ILS came in.”

He said over the years that partnership turned into a fierce and competitive market dynamic.

“Some of this caused the recent soft market that the industry is going through,” he said.

Mr Diodato said both traditional and ILS are now working in the same direction because they are dealing with the same profitability and performance issues.

“That is a good thing for the segment as a whole,” he said.

The 1/1 renewal season was “full of horror stories” for reinsurers, he said.

“It was a very protracted renewal season,” he said. “But from an underwriting point of view, and a profitability point of view, it was a good one because pricing needed to move upwards.”

He said pricing had not been commensurate with the risk in the market.

“Terms and conditions had to be tightened and profitability had to improve,” he said. “Even though many reinsurers probably had some late nights, from a rating and performance point of view, it was well worth it.”

He said there was a lot of media suggesting that $50 billion to $80 billion is needed in the insurance market because of catastrophe issues.

“When we look at it we don’t see a void in capital in the reinsurance segment,” he said. “We see that there has been a lack of deployment because rates are not commensurate with risk. We don’t need new capital in the industry, but as pricing continues, the capital that is there will be deployed.”

Mr Diodato said quality underwriters are getting capital when they need it, but there is not a need to deploy because the rates are not there.

“It is about waiting on the sidelines,” he said. “We do think it is there. It is a matter of when investors feel it is the right time to come back into the market.“

He said there were a lot of positives involving improving industry performance, but there was a riptide in the marketplace.

“Not everything was rosy and perfect,” he said.

He said the market was still dealing with issues such as a constantly changing environment, adding: “No one expected Covid-19 to have the impact that it did.”

Mr Diodato said social and economic inflation is also coming into play.

“Some of those things have not been priced for,” he said. “The central banks throughout the world are putting money into the marketplace to keep liquidity and keep everything going. These are untested and unknown factors that the industry has not dealt with in previous cycles.”

He said there has been a lot of talk about a coming recession, but no one has a crystal ball.

Since 2017, the only profitable underwriting year was 2021.

“Underwriting performance needs to continue to improve,” he said. “That shows the need for tightening of the terms and conditions. Looking at the risk and the pricing was well needed.”