Reinsurers meet cost of capital for first time in four years

The industry's weighted average cost of capital rose to 8.12% in 2023.

For the first time in four years, reinsurers have met their cost of capital, thanks to a rebound in capital gains and underwriting profits, AM Best said.

Despite high interest rates, equity market volatility, and economic uncertainty increasing the cost of capital, reinsurers that effectively balance long-term strategies with tactical decisions and sound risk management have been able to meet or exceed return expectations.

Rising interest rates, stock market volatility, weather events, and inflation have elevated the cost of both debt and equity. The industry's weighted average cost of capital fell from 9.5% in 2010 to 6.25% in 2019, spiked to 9.31% in 2021, and rose again to 8.12% in 2023. 

However, in 2023, reinsurers achieved returns exceeding their cost of capital due to favorable underwriting results driven by repricing and de-risking of portfolios.

The current hard market, resulting from prolonged underperformance and economic inflation despite ample capital, has seen rate increases slow. 

Guy Carpenter reported a 5.4% increase in Rate-On-Line (ROL) for US and European property catastrophe reinsurers as of 1 January, compared to nearly 30% in 2023. Reinsurers have also tightened terms, increased attachment points, and implemented 

de-risking measures, contributing to more sustainable pricing momentum and improving their ability to meet the cost of capital in the medium term.