Property cat risks interest grows ‘cautiously’ amid much-harder market: AM Best
Despite challenging conditions and heightened claims activity, the global reinsurance segment still returned an underwriting profit in 2022, according to a new AM Best report. With tougher market conditions since the beginning of 2023, interest in property catastrophe risks has rekindled but large players have become much more cautious allocating their capital.
The Best’s Market Segment Report, “Global Reinsurers Face Challenges Even as Conditions Improve,” suggested that unlike previous cycles, the price discovery path has taken longer than expected, as the last six years have seen a slow, protracted process of reinsurers realigning their risk profiles, reallocating capital, re-underwriting and repricing.
In the past few years, there has been a shift toward non-catastrophe risks, especially for carriers heavily affected by losses in previous years, according to the report. With much-harder market conditions since the start of 2023, interest in property catastrophe risks has renewed cautiously.
“The January 2023 renewals highlighted the mismatch between supply and demand, but it’s also important to recognise the difference between ‘available’ and ‘deployed’ capacity. Available capital is not under pressure; however, the well-established global reinsurers have become much more cautious allocating their capital, which pressures the deployment of capacity,” said Carlos Wong-Fupuy, senior director, AM Best.
Reinsurers’ profitability began seeing improvement in 2021, reflecting key players’ shift from the lower and medium layers of property catastrophe risks; tightened contract wording; and the re-deployment of capital toward the casualty, specialty lines and excess and surplus primary segments. In 2022, AM Best’s global reinsurance composite posted a combined ratio of 95.6, a 0.8-percentage-point improvement over 2021. At the same time, investment results were affected severely by unrealized losses on fixed-income securities. The global reinsurance segment posted a return on equity of 0.8% in 2022, following a 9.0% ROE in the previous year. Concerns about economic and social inflation, central banks’ contractionary monetary policies, asset market volatility, and the recent underperformance of the global reinsurance segment have translated into a higher cost of capital as well.
AM Best believes that despite the severe decline in shareholders’ equity, global reinsurers remain well capitalised. Given reinsurers’ prudent approach to deploying capital, they are likely to preserve underwriting discipline for a longer period than in previous cycles. However, market participants are under pressure to innovate, expand their presence and assert their role in an evolving economy in which today’s emerging risks will soon become the dominant ones. AM Best’s stable outlook on the global reinsurance segment reflects this balancing act between positive and negative factors.
“Investors will likely demand a strong commitment to underwriting discipline, as well as flexibility to adjust to changing conditions in the business cycle,” said Wong-Fupuy. “Well-established, diversified companies with a proven track record are better positioned to succeed in this effort than startups that are pressured to meet top-line targets.”
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