AM Best gauges market cycle as claims pattern evolves
According to a new AM Best report, the global reinsurance market as a whole has exhibited more underwriting control, as evidenced by a holding back of capacity at the midyear 2019 renewals. However, questions remain over the sustainability of this newfound discipline.
The report, AM Best’s Market Segment Report, Global Reinsurance: Fighting the Last War, claims that the days of large catastrophic events triggering widespread market hardening are gone, replaced by pockets of microcycles, based on geography and loss experience.
According to AM Best, the 2017 and 2018 catastrophes showed how the overall reinsurance market failed to recognise and price for the fundamental changes that had occurred operationally and structurally in Florida’s property market.
The 2018 California wildfires and Typhoon Jebi in Japan also caught many underwriters and capacity providers by surprise, due to a failure to manage appropriately and adequately price for the actual underlying risk.
The failure of some reinsurers to adapt to changing market dynamics has resulted in the global reinsurance composite producing a five-year average combined ratio (2014 to 2018) of 97.6 percent and a return on equity of 6.0 percent.
However, the report states that the evolution of the market can favour reinsurers if they embrace change and innovation in their business models. In addition, while technology can be a key driver of change, it is not the only one.
Paramount to the continued evolution in the reinsurance sector has been the sourcing of new, cheaper sources of capital on one end, and more inventive ways to source risk on the other.
The report says: “Given all that has transpired, finally, it appears that both third-party capital providers and traditional reinsurers held capacity back at the midyear renewal for US and Japanese programmes. But this newfound discipline is once again being driven by the same old supply/demand equation as much as by pricing models.
“It was apparent at the last January renewal that pricing for both property catastrophe and longer-tailed classes of business remained weak despite the series of losses that had previously transpired.
“The rationale for the status quo then on pricing was ample capacity despite losses, rather than acceptable return for the risk. The next question that arises is how sustainable is this newfound underwriting discipline, and how will market participants react if overcapacity begins to push pricing to irrational levels again?”
