Ahead of the annual Rendez-Vous de Septembre industry gathering in Monte Carlo, a new report says that total capital set aside to back reinsurance risks has declined for the first time in more than ten years.

The Best’s Market Segment Report Dedicated Reinsurance Capital Fluctuates Amid Volatile Market Dynamics is part of AM Best’s look at the global reinsurance industry.

The report has dedicated reinsurance capital in 2022 down 7 per cent to $530 billion, ending a decade-long upward trend, although it is anticipated that it will bounce back in 2023.

Reinsurance capital and its distribution will be one topic of note during the 65th edition of the RVS from September 9 to 13, a gathering that provides for bilateral discussions between insurers and reinsurers.

Bermuda’s insurance and reinsurance executives join their global colleagues. Such one-on-one discussions are useful in advance of reinsurance contract renewals.

The 2022 decline in dedicated reinsurance capital, the report said, was driven primarily by mark-to-market investment losses in traditional reinsurance capital, which dropped year over year by $64 billion to $411 billion at year-end 2022.

The report notes: “Most of these losses were due to rising interest rates, widening credit spreads and heightened equity market volatility.

“A measure of fixed-income equity, which anticipates what could be recovered as the bonds mature over time, was included for the first time in the 2022 estimate, mitigating some of the aforementioned losses and bringing total traditional reinsurance capital to $434 billion, albeit still a 9 per cent drop from 2021.”

Dan Hofmeister, Best’s senior financial analyst, said: “The invested asset declines are mainly temporary losses that AM Best believes will be recouped over the near to midterm.

“However, a potentially more-notable driver of the contraction was a diminished appetite to deploy reinsurance capital to writing volatile property catastrophe lines of business, instead deploying it to writing primary and specialty insurance lines.

“The weighted average of net premium written allocated to reinsurance lines dropped below 50 per cent in 2022 and there is no clear indication that this trend will reverse.”

Third-party reinsurance capital essentially remained flat through 2022, according to the report.

Deterrents to the introduction of new third-party capital in recent years include loss fatigue, model uncertainty and opportunity costs for potential new market participants. Additionally, investors were not immune to market volatility in 2022.

AM Best works in conjunction with Guy Carpenter to estimate the total amount of capital supporting the reinsurance industry. Best estimates traditional reinsurance capital; Guy Carpenter estimates third-party capital.

The year-over-year total dedicated reinsurance capital decline in 2022 was the first recorded since the annual examinations began in 2012.

AM Best anticipates that through the remainder of 2023, some of the investment losses will dissipate and capital will be generated through operating returns.

The report said: “The initial estimate for 2023 is a 5.6 per cent overall increase to $560 billion in dedicated reinsurance capital, predominantly from traditional capital growth; however, this estimate does not include possibility of new reinsurers being formed, as any formations through the second half of 2023 would likely not provide capacity until 2024.”

AM Best hosted a video discussion of the report and will host its annual reinsurance market briefing at the Rendez-Vous on September 10.

Best’s annual ranking of the Top 50 global reinsurance groups has just been released and an in-depth look at the insurance-linked securities, Lloyd’s, life/annuity, health and regional reinsurance markets, should be available soon.