AM Best analysts have described why, in terms of both challenges and opportunities, 2020 is a critical year for reinsurers.
Current hardening pricing conditions are said to be creating a window of opportunity for reinsurers, with property catastrophe, specialty lines, and some US casualty lines showing much-needed improvement in pricing and coverage terms.
However there’s a risk that this positive momentum turns out to be short-lived and excess capacity starts expanding again, returning the market to back where it started.
For this reason, AM Best says current market hardening needs to be sustained long enough to offset the impact of prior inadequate market conditions.
Pricing momentum will have to be sufficient to offset the losses from previous years, including the uncertain impact from COVID-19. If reinsurers do not accomplish this, AM Best says they risk losing investor confidence.
AM Best’s Stable outlook on the global reinsurance industry has been described as a reflection of negative and positive forces offsetting one another.
Negative factors include increased uncertainty on claims reserve development associated with previous years’ property catastrophe events, social inflation, and, COVID-19 impacted business interruption and casualty lines.
When combined with an overcapitalised sector, AM Best says these factors translate into companies struggling to meet their cost of capital.
On the positive side, reinsurance renewals during the first half of 2020 started to show strong momentum, with clear signs of a hardening market.
This is reinforced by third-party capital providers reassessing their role in the industry after being affected by loss creep, trapped capital, and a perceived higher risk following discrepancies between actual and modelled claims experience.
For reinsurers, AM Best has described meeting cost of capital over time is critical for survival and to and retain investor confidence.
AM Best believes that the current market hardening will need to be sustained for at least the next year or two to have meaningful impact on the segment.
Meanwhile the January 2020 renewals started a strong positive trend in rate increases and third-party capital supply showed its first signs of retrenchment.
AM Best says the pandemic has drastically accelerated those trends, and simultaneously added uncertainty on both sides of the balance sheet that may offset any predicted gains.
However the improving prospects for new and renewal business does mitigate the uncertainty on both sides of the balance sheet.
AM Best believes third-party capital does not always share the same level of enthusiasm for the hardening market that some equity capital investors have.
That situation may change, however, if prices continue to rise, although from a protection buyer’s point of view, the proposal may reach a point where it becomes economically prohibitive.
In the interim, AM Best can see a flight to quality as cedants focus on reducing counterparty risk.