The inflow of new capital into the industry on the back of improving market conditions could have a detrimental effect on price improvements, although a number of “moving parts” could also have an influence, according to analysis by A.M. Best.
The combination of heavy catastrophe loss years, the lower for longer interest rate environment and the more recent impacts of the pandemic, fuelled widespread optimism for improved pricing heading into 2021, most notably in commercial lines and reinsurance.
In response to the hardening market landscape, listed carriers in London and Bermuda tapped public and equity debt markets to raise fresh capital, while privately-owned players and start-ups looked to both new and existing investors.
With conditions improving and carriers broadly adopting a renewed focus on underwriting discipline and profitability, the expectation was for some fairly strong rate improvements at the key January 1st, 2021 reinsurance renewals.
However, commentary from analysts and company executives following the year’s first renewals season suggests that while price improvements did materialise, these were somewhat of a disappointment considering how prolonged the softened market state had been.
One of the reasons for this is believed to be the substantial level of capital raised ahead of the renewals, aided by the fact investors increasingly looked to the re/insurance industry for greater yield in a low interest rate environment.
“The capital inflow partly reflects the absence of other opportunities for investors. The low interest-rate environment has forced investors – particularly institutional investors – to look further afield for yield opportunities. The risk and reward calculation posed by the insurance industry in a hardening market may look more attractive to existing and new investors,” said Catherine Thomas, Senior Director of Analytics, A.M. Best.
“This year, rates in a number of lines of business continue to harden as the market responds with increased underwriting discipline to adverse claims experience driven by social inflation in the United States, COVID-19-related losses, and in recent years, elevated catastrophe experience,” she added.
According to the ratings agency, while the bolstering of capital at company level is not insignificant, currently, it does not represent a “material addition to industry capital, particularly when combined with existing third-party capital capacity.”
But in spite of this, A.M. Best warns that the inflow of new capital and the resultant increase in capacity, “could have a dampening effect on price improvements.” Continuing to add that it’s important to note that there are other so-called “moving parts” in the equation that could also play a role.
Of course, some of the additional capital raised in 2020 has already been used to absorb prior-year loss reserve development and upward revisions in COVID-19 loss estimates, notes A.M. Best.
Although, analysts stress that it remains unclear to what extent losses related to the pandemic have been recognised by carriers going into 2021, while the impact of the pandemic on insurance demand (and therefore reinsurance demand) is extremely uncertain.
“As economies shrink, so does the value of insurable risk. But when businesses come under financial pressure, their appetite to retain risk may also reduce – increasing demand for insurance cover,” says the ratings agency.
For reinsurers specifically, A.M. Best claims that heightened demand from insurance companies and the lack of available retrocession coverage, could serve to offset the impact of the injection of new capital into the space on supply.
Furthermore, the need for price correction to produce adequate shareholder returns is yet another important element which could influence pricing moving forward, says the ratings agency.
“This need to improve underwriting margins should help sustain underwriting discipline and rate improvements, particularly when the very low investment returns available are taken into account,” say analysts.