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Best’s News & Research Service - September 13, 2022 10:59 AM (EDT)

AM Best: Reinsurers Face Increasingly Complex Loss Potential, but Opportunities Are Also Rising

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MONACO //BestWire// - A rapidly changing risk landscape fueled by geopolitical concerns, inflation and a shift way from natural catastrophe exposure among reinsurers is creating opportunities even as reinsurers watch for uncertain conditions, according to AM Best analysts.

Catherine Thomas

Catherine Thomas

Geopolitical and macroeconomic risks are creating greater awareness of coverage needs and the chance to develop new products and services, said Catherine Thomas, senior director, analytics, AM Best, at the Rendez-Vous de Septembre conference in Monte Carlo.

At the same time, the reinsurance market is facing increasing exposure to emerging and intangible risks, said Thomas. Climate and demographic trends can add to a higher potential for significant unanticipated loss accumulations for reinsurers, she said.

The outlook for the global reinsurance market is rated “stable” by AM Best but the market has some headwinds and tailwinds, including a more complex risk environment, more risk from secondary perils and emerging risks, said Carlos Wong-Fupuy, senior director, AM Best. Economic uncertainty including inflation, rising interest rates and the risk of recession are also factors in the reinsurance outlook, he said.

The reinsurance market remains well-capitalized and while rates continue to increase, they are doing so at a slower pace, said Wong-Fupuy. New capital also continues to enter the market but with a lower impact than in past cycles, he said.

Another development in the reinsurance market over the past year has been a shift away from the property catastrophe segment, said Wong-Fupuy.

Wong-Fupuy also noted reinsurers are facing increasing challenges in modeling for natural catastrophes and hard-to-model events.

In the past, there has been an over-reliance on and complacency with catastrophe risk models as well as a “commoditized” view of risk, said Wong-Fupuy. He added traditional risks are becoming less predictable.

Catastrophe models remain an important part of risk strategy but greater risk unpredictability means other tools need to be developed, he said.

Cyber is an important example as a developing risk that doesn’t yet have developed models, said Angela Yeo, senior director, analytics and head of operations, AM Best. Reinsurers are almost forced to develop their own views of the risk, she said.

The dividing line between primary and secondary perils is also becoming blurred, said Wong-Fupuy.

Human behavior and government intervention are having a greater impact on the reinsurance industry, said Wong-Fupuy. He said government restrictions related to COVID-19 and the subsequent business interruption issue are examples.

Events including the Russia-Ukraine conflict were not an issue 12 months ago but are becoming significant now, he said. The energy crisis is now an issue for government intervention, he said.

Casualty and specialty lines appear to be more attractive to reinsurers but the modeling for those lines is still in early stages, he said.

On the positive side, the reinsurance market is seeing sustained upward pricing and improved terms and conditions, said Thomas.

Reserve development is more positive, and shifts in business mix are leading to more stable results, she said, adding underwriting discipline has improved.

Uncertain market conditions and climate-related losses are enforcing underwriting discipline, she said.

The reinsurance segment remains well-capitalized but is subject to asset market volatility, said Thomas. The market is seeing strong demand from cedants and opportunities are being created from uncertainty and emerging risks, she said.

A number of reinsurers are moving away from catastrophe risk and increasing their appetite for casualty, excess and surplus and specialty lines. These moves come despite concerns reinsurers have about economic and social inflation, which she said are affecting most lines.

Reinsurance rates have risen an average of 15% in 2022 and whether that will be maintained at the next renewal is uncertain, but the market is heading in the right direction, said Yeo.

The industry’s combined ratio also went in the right direction, at below 100 for 2021, she said.

Lloyd’s has posted strong underwriting numbers in the first half, with a combined ratio of 91.4 in the first half of 2022 despite a significant net loss estimate of £1.1 billion ($1.29 billion) related to the Ukraine conflict, said Thomas. The bulk of the Ukraine loss estimate is in specialty lines such as aviation, marine, political risk and trade credit and it is mostly incurred but not reported, she said.

AM Best expects reserve releases to continue, while 2021 releases were somewhat inflated due to COVID-19 reserves as the industry took a conservative view on potential losses in 2020, said Greg Carter, managing director, analytics, AM Best. He said those loss estimates have since become lower.

As economic uncertainty evolves, Carter said inflation began to emerge last year while he noted surprise it’s taken as long as it did to emerge.

The global economy has never seen the money supply increase a rapidly as it has since the 2008 financial crisis. Increased demand after COVID-19 coupled with supply chain disruptions caused inflation to take off, he said

The Ukraine conflict added fuel to the fire along with constrained energy supply in Europe, said Carter.

China’s zero-COVID-19 policy with continued lockdowns will also disrupt the global supply chain, given China’s important role, he said.

Life reinsurers made notable gains in AM Best’s yearly ranking of the world’s 50 largest reinsurers, as Munich Reinsurance Co., Swiss Re Ltd. and Hannover Rück SE retained their top three positions, respectively (BestWire, Aug. 19, 2022). The top 50 reinsurer rankings were published by AM Best in its Best’s Market Segment Report – World’s 50 Largest Reinsurers. Total reinsurance gross premiums written by the top 50 reinsurers rose 9.8% to $353 billion in 2021, AM Best said in the report.

(By David Pilla, news editor, BestWire:

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