Large medium-sized catastrophe claims continue to drive the reinsurance market strongly

Reinsurance pricing conditions are likely to last longer than in previous market cycles, primarily as a result of high persistent claims activity from the build-up of average losses from catastrophes and secondary perils, according to an AM Best report.

Consequently, the report indicated that reinsurance prices are likely to remain firm for several more years, despite the sector’s strong technical results and high capitalization levels.

“Unlike previous boom and bust cycles, there are a number of factors – climate trends, an increasingly complex risk environment and a prolonged period of higher interest rates – that lead us to believe that these spreads Enhanced subscriptions will last at least another couple. years if underwriting discipline is maintained,” AM Best said in its report titled “Strong technical earnings underpin momentum for global reinsurers.”

Riskier environment

Keeping insurers and reinsurers focused is the fact that natural catastrophe claims activity has become less predictable and smaller events such as severe convective storms (SCS) and other secondary perils have become more frequent and costly.

Indeed, AM Best said, secondary hazards, which tend to be less understood and harder to model, continue to drive losses from natural disasters. (Secondary hazards include flooding, fires, and severe convective storms. SCS events can include tornadic and straight-line winds, as well as large hail).

Over the past 30 years, the number of small and medium-sized events – or those under $5 billion in insured losses – has grown steadily, AM Best said, citing Swiss Re.

Medium-severity natural disasters are the fastest-growing category, “both in terms of frequency of events (up 7.5% annually on average over the last 30 years) and total insured losses (up 7, 1%),” according to Swiss Re in a separate report published in March 2024.

“Each year since 2017 (except 2019) has generated more than $100 billion in insured losses. Despite the fact that there were no major hurricanes in 2023, losses from natural disasters totaled approximately $108 billion,” the AM Best report said, noting that the costliest event last year was the earthquake in Turkey and Syria, with 6.2 billion dollars.

There was also an increase in the frequency of more than US$1 billion and severe convective storms, mainly in the US, which brought insurance claims of US$64 billion in 2023, according to Swiss Re.

The report explained that one of the main reasons why global reinsurance generated excellent technical results in 2023 was the absence of a single major natural catastrophe event in 2023.

The reinsurance sector has also benefited from higher attachment points, lower limits, added exclusions and tighter contract wording, meaning “most of the costs of working layer claims are retained by the primary carriers,” a AM Best said. “The rate reduction is limited to the outermost levels of protection in the best US accounts. Prices are still considered attractive and the discipline required to comply with current terms and conditions appears to be here to stay.”

On the other hand, reinsurance coverage for high-frequency risks (such as SCS events) has become cost-prohibitive or is severely restricted to the best-performing books, the report said.

Much needed adjustment

The report recalled that the global reinsurance segment by 2017 had deployed some of the considerable amount of capital to support such high frequency layers.

However, following major losses that year from Hurricanes Harvey, Irma, and Maria, when the average combined ratio of reinsurers exceeded 110% and property reinsurance rates were at their lowest Rate-On-Line Index ( ROL) from 2000 (according to Guy Carpenter). ), the segment slowly began its path to a burgeoning market. (Combined ratios above 100% indicate a subscription loss).

Reinsurers began to set prices, tighten terms and conditions, and moved away from property/catastrophe reinsurance by raising attachment points and reducing limits. In addition, AM Best said, they have expanded their primary and reinsurance operations as well as their casualty books. These efforts included a massive withdrawal of capacity during the January 2023 renewal period.

“A much-needed shift away from high-frequency layers, the adoption of tighter contract wording and a better-defined scope of coverage have repositioned the historical role of reinsurers to focus on providing capital protection rather than stabilizing earnings” , the report explained. .

These corrective measures began to bear fruit in 2021 when, for the first time in several years, AM Best’s global reinsurance composite had combined ratios below 100. In 2023, reinsurers saw average combined ratios move below 90 in Europe , USA and Bermuda, and Lloyd’s, AM Best said.

Following the segment’s refocus on technical earnings, AM Best revised its outlook for the global reinsurance segment from stable to positive in June.

Future Perfect?

Following these corrective measures taken over the past few years (combined with current market and economic conditions), reinsurers’ profit margins will be sustainable over the medium term, although they are unlikely to remain at such high levels, AM Best said .

The report suggests that a key factor behind reinsurer underwriting discipline is a lack of new entrants, which has typically occurred in previous tough market cycles when new reinsurers were formed to take advantage of tough market conditions. (See related article: What Happened to ‘Class of 2023’ Reinsurance? Hard Market Defies Age-Old Patterns.)

“The current tough cycle has not been characterized by capital depletion,” Carlos Wong-Fupuy, senior director, AM Best, said in a statement accompanying the report. “Unlike previous tough cycles and despite the very attractive pricing environment, new company formations have not materialized, particularly in the real estate catastrophe space. Disappointing results during the previous extended market have deterred potential new investors.”

AM Best went on to explain that a combination of factors has discouraged investors from backing new reinsurers. “Historical underperformance, a riskier environment that is more difficult to model and price, and most importantly, a new phase of higher interest rates all contribute to a higher risk premium for potential investors looking to finance new ventures,” the report said. .

In other words, investors now have higher return expectations because they can now find higher returns from competing, more flexible investment alternatives that require shorter-term capital commitments.

“Capital has become more nimble and opportunistic, focused either on already well-established and successful quoted balance sheets with a proven track record, or on short-term insurance-linked vehicles (ILS). Higher interest rates have contributed to this behavior given the availability of much more attractive investment alternatives on a risk-adjusted basis than in the past.”

Despite above-average catastrophe loss activity during the second quarter of 2024 and a few big losses, such as the Baltimore Bridge collapse in March, results remain strong and on track for another profitable year, it confirmed AM Best.

“After the sharp increases in 2023, the pace of consolidation has clearly slowed during the mid-year renewals, but Guy Carpenter’s Global Property Cat Online Rate Index has already surpassed the harsh levels of 2006 that followed hurricanes Katrina, Rita and Wilma. “, the report says.

“The stellar results seen in 2023 are unlikely to be repeated, and most companies’ own targets, while optimistic, are more modest. The performance for the first half of 2024 is very comparable on an annual basis, providing a comfortable margin of uncertainty.”

Booking questions

Outside of the natural catastrophe space and following actions to strengthen reserves, AM Best said, there remain concerns about the performance of legacy US casualty as well as some life reinsurance books. (See related article: AM Best downgrades SCOR’s credit ratings after L&H Reserve announcement.)

“The big question is how industry-wide these problems might be, and how promptly and thoroughly the affected carriers reacted to correct any problems,” the AM Best reinsurance report said.

AM Best noted, however, that the de-risking and diversification measures taken by the global reinsurance segment mean companies are much more resilient than in previous cycles. “The potential negative development of historical debt books, while impacting performance metrics, is unlikely to have a significant effect on risk-based capitalization in a segment characterized by very strong scores or earnings players within Best’s Capital Adequacy Ratio (BCAR).

AM Best said concerns about social inflation in the US liability line “have led to tighter underwriting, customer selection and pricing adjustments for new business”.

Sophisticated risk management, strong balance sheets and partnerships with insurance-related securities/backward markets contribute to consistent and more stable results for reinsurers, he continued.

“While prudent capital deployment and some level of downsizing have been necessary to restore profitability, the market position, balance sheet strength and expertise enjoyed by the major players put them in an ideal position to gradually take on more among the emerging risks that are becoming dominant in a rapidly evolving economy.”

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Personal Car Price Trends Reinsurance Market