The global reinsurance outlook remains stable as improved pricing for most business lines offsets growing claims uncertainty and an abundance of capital, AM Best says.

Reinsurers have been able to absorb pandemic impacts despite material losses, balance sheets remain resilient and business has been renewed under more restrictive terms and conditions and at better rates.

“After several years of struggling to meet their cost of capital, key players have started to turn the corner,” a report released last week says.

But AM Best says considerable uncertainty remains over the final size of COVID-related claims and risk in general has become more difficult to model and price due to unexpected correlations.

The ratings company warns reinsurers will need to be innovative to maintain relevance in the broader economy, as more risks deemed uninsurable because they are systemic or not measurable or manageable would translate into a smaller role for the industry.

Dedicated reinsurance capital was $US520 billion ($697 billion) at the end of last year according to AM Best and Guy Carpenter estimates, split 80/20 between traditional and third-party capital.

As traditional reinsurers attempt to minimise balance sheet volatility, the role of third-party capital in providing retrocessional capacity is critical, with most major global reinsurers strengthening their ILS platforms as they see the segment as a partner rather than a competitor, AM Best says.

The report says recognised COVID-related losses for the (re)insurance industry so far stand at about $USD40 billion ($54 billion), compared to original estimates at least twice as high.

Around half the recorded losses are attributed to reinsurance, but final settled amounts may take many years to develop and could differ materially.

AM Best says at the beginning of the pandemic, government authorities and industry leaders, particularly in Europe, floated the idea of developing a (re)insurance pool scheme based on a public/private partnership model similar to those in place for large natural disasters.

“But enthusiasm never materialised and political priorities changed,” it says. “Despite the evident willingness of certain global reinsurers to play an active role, many felt that governments should take the first step.”