Rating agency AM Best has released a new report, which notes how 2021 started with significant catastrophe activity for reinsurers due to its major winter storms in the southern United States, testing the year’s budgeted catastrophe loads.
Estimates place the total industry loss around USD15 billion to USD20 billion, which the rating agency believes is the largest first-quarter US natural catastrophe (NatCat) event to date.
For AM Best’s reinsurance composite, the initial estimate of losses translates into an average of three points in the loss ratio.
This compares with a range of five to 12 points in the combined ratio for a NatCat load that most reinsurers included in their budgets for the full year.
Although these losses are certainly significant, so far they have not elicited any rating events among the companies in the composite, given their strong balance sheets, reflected in BCARs of around 40% at 99.6% VaR level. Whether the budgeted cat loadings will be sufficient, as we traverse the North Atlantic hurricane season, remains to be seen.
AM Best noted that for the last couple of years, normalised loss ratios generally have declined, reflecting corrective underwriting actions by most insurers.
However, the pandemic and higher incidence of secondary perils have added noise to the results for the last 15 months.
In the past, this could have been considered part of the claims cycle. Recent experience, however, seems to indicate a relentless rise in the frequency of non-attritional losses, adding a more sustained layer of volatility to the results, says the rating agency.
Until now, the natural response from most reinsurers has been to restrict coverage, shifting the focus toward higher layers of protection for non-proportional business or even declining participation altogether in specific risks, from commercial auto to communicable diseases to cyber risks.
AM Best expects to see some expansion in capital available in the short term, which doesn’t necessarily translate into much larger amounts of exposures covered. The segment is attracting investors due to rate increases in specific business segments, not in expectation of the pie becoming larger.
The increased risk awareness from insureds and cedents is not being seen yet as an opportunity to develop new products and close the re/insurance gap.
Although greater risk awareness may lead to stronger re/insurance demand, the perils that society faces are becoming more complex and interrelated, which questions already established models covering traditionally well-understood risks, such as Atlantic hurricanes.
Climate-risk-associated trends will make the almost simultaneous occurrence of these events more likely, not less.
The report also explained that the COVID-19 pandemic has shown that re/insured losses were not restricted to life and health risks, but driven by government intervention in the form of nationwide lockdowns and travel restrictions that triggered business interruption and event cancellation claims.