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Reinsurers move away from cat risks

Secondary perils: Military Emergency Unit personnel Monday fight a forest fire in Useres, eastern Spain. Drought and extremely high temperatures are turning 2022 into the worst year of the century in terms of fires. (UME via AP)

Reinsurance companies are increasingly shifting away from the uncertainty of catastrophe risks and orientating their business mix more towards casualty and specialty primary lines, where pricing movement remains positive, a report says.

Larger storms and secondary perils have led to increased losses from the natural catastrophe events. Added to that have been the pandemic impacts and economic uncertainty.

A new AM Best study, Best’s Market Segment Report, is out, entitled Global Reinsurance: More Stable and Improved Results Following Shift from Property Catastrophe Risks.

It 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 new report, a higher frequency of catastrophe events in the past five years is exerting significant pressure on the level of confidence users put in modelling tools, a key component in the pricing process.

There has been an upsurge in secondary perils, sometimes medium-sized events such as violent storms, forest fires, localised flooding — smaller events that collectively become costly.

For the year 2020, their economic cost amounted to $60 billion.

Last summer, record heat, devastating floods, storms, heavy rains and raging fires were felt around the world. Projections forecast an upward trend.

Best said in a press statement: “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 Mr Wong-Fupuy. “Secondary perils also have become more prominent than ever.”

The report concedes: “AM Best still views the global reinsurance segment as very well capitalised and disciplined.

“A number of realignment 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 per cent for the first time in five years, at 96.4 per cent, with a return on equity of 9.2 per cent, compared with 2.3 per cent 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 recognises 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 Mr 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.”

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Published August 16, 2022 at 7:45 am (Updated August 16, 2022 at 7:46 am)

Reinsurers move away from cat risks

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