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Dedicated reinsurance capital fluctuates amid volatile market dynamics

Total dedicated reinsurance capital in 2022 declined by 7% to $530bn, ending a decade-long upward trend, according to a new AM Best report.

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 ahead of the Rendez-Vous de Septembre in Monte Carlo.


According to this report, the 2022 decline in dedicated reinsurance capital was driven primarily by mark-to-market investment losses in traditional reinsurance capital, which dropped year over year by $64bn to $411bn at year-end 2022. 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 $434bn, albeit still a 9% drop from 2021.

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

“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% 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. AM 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.

Looking ahead

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



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