Hardening pricing conditions are helping reinsurers overcome the challenges around COVID-19, social inflation and exposure to previous catastrophe events, according to AM Best.
Negative market forces affecting the global reinsurance industry are being offset by hardening rates and a re-assessment of third-party capital investor appetite, AM Best said in its new Market Segment Report, Global Reinsurers Maintain Equilibrium Through COVID-19 Turbulence.
Property catastrophe, specialty lines and some US casualty lines in particular are showing much-needed improvement in pricing and coverage terms, AM Best said. However,it warned the effect may not last long enough to fully offset the impact of prior underwriting losses and the impact of COVID-19.
For now, these counterbalancing factors explain why the rating agency has given the industry a stable outlook, the rating agency said.
“If reinsurers do not sustain stronger pricing, they risk losing investor confidence,” it said.
The global reinsurance composite has produced a five-year (2015-2019) average combined ratio of 99.6 percent and a return on equity of 5.7 percent, AM Best said. It said 3-4 percentage points of that combined ratio performance is attributable to favorable loss reserve development, a benefit that continues to diminish. Without prompt, corrective action, that will create a drag on earnings, the rating agency said.
AM Best noted that, despite the COVID-19 pandemic, the catastrophe bond segment of the insurance-linked securities industry rebounded during the first half of 2020. However, considerably higher delinquency rates in the second-quarter 2020 reflect the pandemic’s ongoing strain on the reinsurance segment’s mortgage-related activities, it added.