Global reinsurance outlook remains stable, says ratings agency
The outlook for the global reinsurance segment remains stable, according to AM Best.
The ratings agency said in a new segment report that the affirmation of the outlook was driven by substantial rate improvement, primarily in property lines, with higher average attachment points expected to result in widening profit margins.
It said additional factors contributing to the stable outlook include an increased demand for coverage due to heightened catastrophic loss activity and rising investment income with new money yields on fixed-income investments more than doubling.
The report also noted that there was increased demand for reinsurance from life and annuity insurers.
The report cited several offsetting factors, chiefly the persistent growing uncertainty about underlying risks, including frequency and severity of weather-related activities and evolving risk profiles.
Cautious new capital, despite improved market conditions, and concerns about economic and social inflation were also identified as mitigating factors to the stable outlook, according to the report.
"Consistent with recent history, insurers have been plagued by elevated weather-related losses, including secondary perils," said Carlos Wong-Fupuy, senior director, AM Best. "Rising sea surface temperatures and elevated coastal property values continue to adversely impact modelled loss projections.
“These factors have prompted some reinsurers to retract significant amounts of capital from the property reinsurance market. Those remaining reinsurers have benefitted from the reduced supply via drastically higher attachment points and higher risk-adjusted rates on line."
Despite some disparity between primary insurers’ and reinsurers’ underwriting returns through the year, AM Best said it does not believe reinsurers will relax their stance for some time. The market is currently working in favour of reinsurers, but investors' appetites had already been stressed for an extended period before the market shift, AM Best said.
AM Best also noted that some casualty reinsurers have reported pockets of adverse reserve development, triggered mainly by social inflation in the US.
“Some larger players reduced their exposures, particularly in public D&O (directors and officers) and excess casualty. Reinsurers will need to maintain prudent loss reserving methodologies to account for the impact of social inflation as well as general inflation, in the years to come.”
On life reinsurance, AM Best said reinsurers have reported an improvement in mortality since the height of the pandemic, non-Covid mortality experience remains generally higher than expected – life reinsurers have noted an uptick in deaths related to liver disease, drug use and diabetes – and whether mortality will revert to pre-Covid levels remains to be seen.”
The report also addressed the impact of the rise in interest rates, particularly with regard to unrealised investment losses. "The mark-to-market losses many insurers experienced was not substantial enough to result in a strategic shift in business to reduce capital burdens," said Dan Hofmeister, senior financial analyst, AM Best. "Property/casualty reinsurers retained adequate liquidity and were able to recoup much of their losses as their fixed-income investments matured."
The report also noted that insurability is “one of the less emphasised issues in the current market”.
It said: “Particularly in the US, coast property values continue to rise as more and more property owners flock to catastrophe-expose areas. Government and state-sponsored entities/programmes providing coverage of last resort as well as price regulation have created perverse incentives, counteracting the market signals that should have prevented continued property development on flood plains and other adverse terrains.
“Similar issues are affecting wildfire-exposed regions. Insurers see themselves challenged between prudent risk management and the desire to retain market share.”
