Given increased losses from not only natural catastrophe events, but from so-called secondary perils as well, along with the pandemic impacts and economic uncertainty, many global reinsurance companies have shifted their business mix into casualty and specialty primary lines where pricing movement is still positive, according to a new AM Best report.
The Best’s Market Segment Report, “Global Reinsurance: More Stable and Improved Results Following Shift from Property Catastrophe Risks,” is part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo. Additional reports, including AM Best’s annual ranking of the Top 50 global reinsurance groups and in-depth looks at the insurance-linked securities, Lloyd’s, life reinsurance, mortgage and regional reinsurance markets, will be available during August and September.
According to this new report, a higher frequency of catastrophe events in the last five years is exerting significant pressure on the level of confidence users put in modelling tools, a key component in the pricing process. In addition, reinsurers are finding that not only the underwriting environment has become less predictable, as government action also has had a huge impact in market conditions.
“One of the reasons behind the abundance of capital was the low interest rate environment,” said Carlos Wong-Fupuy, senior director, AM Best. “Now that central banks are trying to control inflation, capital is becoming tighter, recession fears loom and asset valuations declines are hurting balance sheets in a way that catastrophe losses thus far have not been able to.”
Even with rate increases, most reinsurers view current pricing on property catastrophe risks still not high enough to compensate for the ongoing level of uncertainty, whereas casualty and specialty primary lines are more attractive as they comparatively generate more stable, predictable patterns.
Social and economic inflation remain an issue, but current margins embedded in the pricing reward reinsurers adequately for the risk taken. The report also notes that the long-term nature of casualty lines provides the opportunity to generate investment returns and dramatically reduce liquidity risk.
“Although casualty and specialty lines are not immune from accumulation risk, as seen in major events such as the pandemic or the Ukraine invasion, they are considered to be more manageable and less frequent compared with a natural catastrophe on the property side,” said Wong-Fupuy. “Secondary perils also have become more prominent than ever.”
AM Best still views the global reinsurance segment as very well-capitalized and disciplined. A number of re-alignment initiatives have been taking place for at least the last three years, and although the pandemic slowed the results of those efforts, the global reinsurance segment generated a combined ratio in 2021 below 100% for the first time in five years, at 96.4%, with a return on equity of 9.2%, compared with 2.3% in 2020.
Carriers continue to invest significant resources to address the rapidly evolving risks that it faces, and most highly rated companies have demonstrated the ability to adapt their business plans to changing market conditions and generate sustained profits. Reinsurers remain innovative due to their level of sophistication in risk selection, pricing, product development and capital management.
For these reasons, AM Best is maintaining its stable market segment outlook on the global reinsurance industry. At the same time, AM Best recognizes that the strength and relevance of each driver underpinning the outlook remains in flux, with business profiles shifting to reflect the growing complexity of the risk environment at a global level.
“Informed uncertainty is at the core of a portfolio of insurable risks,” said Wong-Fupuy. “In the end, the balance between the volatility of recent experience and perceived margins embedded in current rates is what determines risk appetite. For certain types of risks, such as natural catastrophes, that recent volatility has become either too onerous, or for some reinsurers, unacceptable.”