Fears of sustained inflation and a potential recession may lead to a decline in overall available reinsurance capital in an environment where various influences on the sector remain in flux, AM Best says.

AM Best says in a global reinsurance market review that capital remains plentiful but is subject to investment market volatility.

“For year-end 2022, based on how the investment markets have reacted so far to the interest rate hikes as well as fears of sustained inflation and a potential recession, we expect a decline in overall available capital,” the report says. “Based on conservative estimates, we may see a return close to the levels observed at the end of 2020.”

The report says secondary risks are becoming more prevalent and heightened natural catastrophe activity has put investor risk tolerance to the test, but drivers overall in recent years have tended to offset each other.

“Unlike previous market cycles, dominated by a few, but clear trends such as a wave of new entrants to the market attracted by steep rate increases, following capital erosion, the last four years have been characterised by a number of positive and negative drivers, with limited influence on their own, but which, on balance, continue to counter each other,” it says.

AM Best says volatility and uncertainty remain key issues despite pricing improvements and there’s a strong preference for stable results over higher expected profit margins.

For the past two years, reinsurers have been shifting covers to higher layers of protection, raising deductibles, lowering limits, adding explicit exclusions, avoiding aggregate covers, restricting specific perils and geographies, and generally becoming more selective, it says.

See ANALYSIS.