Heightened demand for protection, continued positive price momentum and a disciplined underwriting environment has seen ratings agency A.M. Best maintain its stable outlook on the global reinsurance industry.
AM Best’s latest reinsurance market segment report highlights some positive and negative factors for the sector as the new year edges closer.
Underpinning the stable outlook is substantial cumulative rate increases as a result of rising loss cost inflation, which, combined with enhanced discipline has dramatically improved the underwriting opportunities for most reinsurers.
And, with the important January 1st, 2022 reinsurance renewals fast approaching, AM Best has said that it expects to see price improvements to persist for the majority of business lines, both at 1/1 and beyond.
Although, the ratings agency adds that any improvements will likely be at a slower pace than previous years, suggesting a deceleration of rate momentum.
2021 has been another active year for catastrophes and insured losses are once again above-average. As elevated cat activity continues to hinder returns, exacerbated by the impacts of historically low interest rates, AM Best expects the industry to remain focused on the need for more rate.
Additionally, the ratings agency notes the influence of several years of social inflation concerns, which has served to drive up prices in the casualty lines, and how these same issues may be “creeping into property lines.”
Given the level of cat activity seen so far this year, including Winter Storm Uri in Q1 and the more recent Hurricane Ida and European floods in Q3, loss-affected lines are expected to witness the most dramatic rate increases.
However, AM Best warns that certain layers of catastrophe lines could disappoint from a rate perspective, “where the presence of alternative capital continues to mute pricing gains, to a degree.”
Ultimately, the ratings agency does not expect insurance-linked securities (ILS) investors to pull back from the natural catastrophe reinsurance space at Jan 1st.
Alongside the favourable pricing outlook, AM Best notes greater demand for reinsurance protection as another driver of its segment outlook.
According to AM Best, as primary insurers seek a more stable performance and capital efficiency in a challenging and uncertain environment, reinsurance demand has and will continue to grow, which in turn is benefitting some of the smaller reinsurers.
“The flight to quality continues, in the form of rated and regulated balance sheets offering purchasers peace of mind with regard to how they manage their own risks,” says AM Best.
The report also cites numerous negative factors in the reinsurance segment. This historically low interest rates on fixed-income investments that are in most cases below loss cost inflation, and adverse loss reserve development in casualty lines of business due to sustained social inflation.