Reinsurers shift away from property catastrophe risks
According to the new report, a higher frequency of catastrophe events in the last five years has put pressure on the level of confidence users put in modeling tools, a key component in the pricing process. Reinsurers have also found that the underwriting market has become less predictable as government action has impacted market conditions.
“One of the reasons behind the abundance of capital was the low interest rate environment,” said Carlos Wong-Fupuy, senior director at 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 say current pricing on property catastrophe risks is still not high enough to compensate for the ongoing level of uncertainty. Casualty and specialty primary lines, on the other hand, are more attractive because they generate more stable, predictable patterns, AM Best said. While social and economic inflation remain an issue, current margins embedded in the pricing give reinsurers adequate reward for the risk. The report also found that the long-term nature of casualty lines provides the opportunity to generate investment returns and dramatically lower liquidity risk.
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“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,” Wong-Fupuy said. “Secondary perils have also become more prominent than ever.”
AM Best still views the global reinsurance segment as very well-capitalized and disciplined. In 2021, the global reinsurance segment generated a combined ratio below 100% for the first time in five years at 96.4%, with a return on investment equity of 9.2%, compared with 2.3% in 2020.
Carriers continue to invest significant resources to address the risks faced by the sector, and most highly rated companies have demonstrated the ability to adapt their business plans to changing market conditions and generate sustained profits, AM Best said. The rating agency is maintaining its stable market segment outlook for the reinsurance agency, while recognizing that the strength and relevance of each driver underpinning that outlook remains in flux.
“Informed uncertainty is at the core of a portfolio of insurable risks,” Wong-Fupuy said. “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.”