“Risk of unexpected correlations has never been higher,” warns AM Best
In a market that is ever-more challenging for insurers, the potential for risk accumulation and unexpected correlations has never been higher, according to a new report by AM Best.
In a report called ‘Insurers hunt for diminishing opportunities in a market laden with challenges,’ the rating agency focuses on the threats and opportunities posed by accumulation risk, pandemic, low interest rates, energy prices and adverse reserve development.
The rating agency notes that over the past decade, the insurance industry has been faced with numerous tests, including major catastrophe losses, the global financial crisis, regulatory changes and more recently uncertainty created by political events.
It said that while lessons have been learnt from the past, the extended pressures of diminishing investment returns, dwindling loss reserves and intense competition are beginning to erode industry fundamentals. “And in an increasingly complex, interconnected world, the potential for risk accumulation and unexpected correlations has never been higher,” the report said.
Catherine Thomas, senior director, analytics and one of the authors of the report, said: “Devising new solutions and products to help close the protection gap, making better use of data and exposure management tools, and pursuing growth with control and discipline are some of the areas in which insurers and reinsurers can create competitive advantage and prosper in an otherwise difficult operating environment.”
Mahesh Mistry, director, analytics, and co-author of the report, added: “There is no doubt that the re/insurance industry is entering a highly challenging period in its history. It is a time when margins are coming under increasing pressure at all levels of the industry and return on equities are now in high single digits. If tested by a major event or series of events, and with diminishing reserve releases to fall back on, industry fundamentals could begin to deteriorate.”
