Reinsurers can thrive in a rapidly evolving global insurance market if they embrace change and innovation in their business models, according to an AM Best market segment report, titled Global Reinsurance: Fighting the Last War.
As well as investing in technology, this means sourcing new, cheaper sources of capital, and finding more inventive ways to source risk, it explained.
The growth in the collateralised reinsurance market shows many reinsurers are heeding this message. This market absorbed a substantial amount of the related losses from the catastrophe events of 2017-2018, but remains the fastest-growing segment of the insurance-linked securities market, noted AM Best. It found collateralised reinsurance has a market capitalisation of approximately $55 billion, out of a roughly $98 billion ILS market.
AM Best urged reinsurers to look forward and reposition their portfolios tactically, rather than basing their decisions on what has happened in the past. “Reinsurers that allow past performance to shape their expectations of future performance will be the ones more likely to be caught off-guard again,” said Scott Mangan, associate director at AM Best.
Catastrophe events in 2017-2018 highlighted the differences between insurers in terms of how they have adapted to the operational and structural changes in Florida’s property market, said AM Best. The 2018 California wildfires and Typhoon Jebi in Japan also caught many underwriters and capacity providers by surprise, it added, 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 an average combined ratio of 97.6 percent between 2014 and 2018, with a return on equity of 6.0 percent.
AM Best noted that, despite the capital markets’ increased influence, dedicated reinsurance capacity remained almost flat in 2018, at $436 billion. Convergence capital inched up to $95 billion from $87 billion in 2017 - a trend the rating agency expects to continue in 2019.
But AM Best expressed concern that supply-demand considerations drove the underwriting discipline as much as the pricing models. It fears overcapacity could push pricing to irrational levels again.
AM Best, Collateralised reinsurance, Scott Mangan,