Global reinsurance market outlook stable, reinsurance capital exceeds $470 billion in 2020:AM Best

In its new Best’s Market Segment Report, “Market Segment Outlook: Global Reinsurance,” AM Best states that the current market hardening likely will need to continue for at least a couple of years to have a meaningful impact on the segment. Additionally, pricing momentum will have to be sufficient to offset losses from previous years, including the impact of COVID-19 and ongoing impact from social inflation.

 

London: 

AM Best has maintained its market segment outlook on the global reinsurance industry at stable for 2021, citing factors that include positive pricing momentum, combined with tighter terms and conditions, offset somewhat by uncertainty with regard to claims reserve development associated with previous years’ property catastrophe events; social inflation; and more recently, business interruption and casualty lines, related to COVID-19.

In its new Best’s Market Segment Report, “Market Segment Outlook: Global Reinsurance,” AM Best states that the current market hardening likely will need to continue for at least a couple of years to have a meaningful impact on the segment. Additionally, pricing momentum will have to be sufficient to offset losses from previous years, including the impact of COVID-19 and ongoing impact from social inflation.

At the same time, the improving pricing environment and market discipline, the re-assessment of the role of third-party capital providers following the impact of loss creep and trapped collateral, as well as the ongoing stability in the global life reinsurance segment, are viewed as positive factors.

The COVID-19 pandemic has added more uncertainty to a segment that has experienced increased loss activity in recent years. As a result, reinsurers’ ability to rely on favorable prior-year reserve development has been diminishing steadily.

Although the robustness of modeling for the best-understood risks—such as U.S hurricanes—is being called into question, the incidence of risks that are more difficult to model—such as wildfires, cyber or pandemics—continues to grow.

The life segments of global reinsurers have reported negative impacts on profitability due to COVID-19-related claims for the first nine months 2020. However, this impact is typically much smaller in magnitude than it is for their non-life books of business.

AM Best’s most-recent estimate of dedicated reinsurance capital exceeds the $470 billion at year-end 2020, including approximately $ 85 billion of third-party capital, a figure that has stabilized after several years of rapid expansion.

Third-party capital inflows had been driving excess capacity and contributing to reinsurers’ struggle to meet their cost of capital; however, rising frequency and claims amounts have disrupted those dynamics, and issues related to trapped capital and loss creep are forcing some third-party capital investors to re-assess their positions.

AM Best also has noted a number of capital-raising initiatives this year, as well as the entrance to the market of several startups expecting to benefit from the pricing momentum. The new market entrants, while significant in size individually, are unlikely to shift pricing trends for the market as a whole.

Not all companies will be able to take advantage of improved market conditions. Business mix and recent underwriting performance by line of business are key, and the flight to quality is likely to play a role.

Financial strength, reputation, market position, product diversification, healthy balance sheets and consistent and transparent underwriting performance may prove to be the differentiators between winners and losers.

Claims Reserve Development Uncertainty

Estimates for ultimate COVID-19 related losses affecting both direct insurers and reinsurers globally range widely, from USD30 billion to USD100 billion

The latest estimate for reported losses has already reached USD25 billion.

The particular way this affects specific companies is linked to their business mix. For the major global reinsurers, the impact on loss ratios ranges from around 5% to 20%, reflecting a variety of reserving assumptions and approaches, as well as level of concentration in particular product lines.

For most composite reinsurers, the financial impact has thus far been much more pronounced for property/casualty exposures than for the life segment. A significant proportion of COVID-19 claims is attributable to event cancellation, which tends to be heavily concentrated amongst the largest European reinsurers and the Lloyd’s market.

Additionally, the spike in business interruption claims has been much more severe than assumed during the early days At the same time, the different risk profile between insured lives—typically younger, healthier, relatively more affluent, and economically active—and the population most affected by the pandemic helps explain the lower-than-expected mortality experience.


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