24 August 2016 Insurance

Opportunistic capital may dampen post-event hardening

Though most London market insurers are performing well and have strong balance sheets, they must beware of the threat of opportunistic capital exploiting any turn in the market. They must adapt their soft market strategies with this in mind, AM Best has claimed in a report.

AM believes insurers need to adapt their traditional soft market strategies to adhere to a changing operating environment, where diverse and plentiful capital is ready to quickly exploit any post-event market upturn.

AM Best suggests that there are fundamental challenges to the market’s competitive position and prospective profitability, with traditional business models under threat from consolidation, alternative insurance structures and changing buying patterns.

The ratings agency warns that underwriting profitability is under pressure from lower premium rates and higher expenses, despite the generally strong capital positions of companies.

Catherine Thomas, senior director and author of the report, said: “Premium rates across the market continue to fall, as traditional and alternative capital compete for business. Large property and energy risks, particularly those that are catastrophe exposed, remain under most pressure.”

Thomas added: “A more granular segmentation of portfolios, supported by strong data analytics, is increasingly necessary to identify pockets of profitable business.

“In the property sector, a higher proportion of insurers’ catastrophe budgets are being allocated to binder business, where prices are proving more resilient to competition than in the reinsurance and open market segments.”

AM Best highlights that there has also been an increased focus on casualty business, which is less vulnerable to competition from capital markets.

AM best suggests that maintaining access to profitable business is increasingly difficult and some insurers will need to expand their global footprint in order to remain competitive.

Looking forward, AM Best believes that the subsequent pressure on expense ratios likely will necessitate an increase in scale.

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