Reinsurers turn from property nat cat to casualty and specialty: Best

The reinsurance sector continues to see positive and negative drivers affecting the market cycle which have tended to counter each other, according to AM Best. It noted in particular a declining appetite for property natural catastrophe risk and a shift toward excess and surplus lines, casualty lines, or primary specialty business. Best also noted that the expected pace and effect of new entrants emerging since 2019 has not materialised, while recent concerns about a long-term low interest rate environment have transformed into fears of sustained inflation and potential recession. It adds that rates, terms and conditions continue to improve for reinsurers, but with no consensus about their adequacy. Best highlighted changes in risk appetite, notably a move away from property nat cat risks. This is partly due to growing scepticism about models and to the global risk environment continuing to get more complex. “Traditional natural catastrophe models are being subjected to renewed scrutiny due to the increase in the frequency of events in the last five years, usually attributable to climate trends, but for which scientists do not yet have definitive answers, especially in quantitative terms. ‘Secondary’ perils are becoming more prominent – and thus less secondary. By definition, their modelling is less well developed and less accepted,” said Best. The ratings agency added that most reinsurers’ risk profiles are shifting rapidly toward excess and surplus lines, casualty lines, or primary specialty business, thanks to expectations of higher and more stable underwriting margins, despite persistent concerns about economic and social inflation. Casualty lines, a segment with more stable, predictable patterns than property catastrophe risks, have been seeing attractive price increases in most reinsurance portfolios, said Best. “Social and economic inflation remain issues but the general feeling is that the current margins in pricing reward reinsurers adequately for the risks taken,” it said. “Perhaps the most evident case for growing risk appetite despite the scarcity of robust modelling is the interest that some reinsurers are showing for cyber risk coverage,” said Best. “Pricing has risen steeply over the last few years, making cyber coverage margins appear more attractive and thus giving rise to the fear of missing out on a potential profit opportunity. Available models are still at an early stage of development. Although they help in better understanding the nature of the risk, attempts at quantification generate a very broad range of outcomes at best. Exposure management is based mainly on applying coverage limits.” According to Best, there is consensus about positive price movements being led by primary markets, particularly the specialty lines. “Despite the immediate benefit that reinsurers writing proportional business enjoy, the general feeling is that, overall, they are lagging. Even the retro markets seem to have seen more pronounced price increases, in line with reduced availability,” it said. Best believes that pricing for property cat is likely to continue rising into next year, whereas casualty and specialty lines have seen increases slow down. “Margins remain attractive given the recent claims experience. The same can be said about cyber risks, for which interest is strong but typically accompanied by cautious growth and strict control of cover limits,” said Best. The big question, according to Best, is about the potential impact of inflation: “A combination of climate-related trends, and economic and social inflation, is driving reinsurers to reconsider whether rates are indeed allowing for sufficient margins, and to what extent cedants are pricing inflationary risks at source.” Best asked: “Will the 2023 renewals mark a turning point for a ‘true’ hardening market, able to attract new capital in droves and expand supply? Will third-party capital providers move first, as they have in previous cycles, taking advantage of the current retrenchment from traditional players and driving a new softening trend? Trying to predict the future is even more complicated nowadays, because how the year-end renewals go will depend heavily on actual claims activity and on where the global economy goes.” And the ratings agency concluded: “If we have another active property catastrophe year – even one with no major catastrophic event but an accumulation of several medium-sized ones as in the recent past – and inflationary pressures continue, combined with recession fears, uncertainty could remain so high that few investors will feel comfortable deploying capital regardless of the price. A few new entrants will still try but their impact is likely to be limited in a market in which rates could continue to rise in response to more limited dedicated capacity.”

Reinsurers turn from property nat cat to casualty and specialty: Best

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