Reinsurance News

Changes in risk appetite & models skepticism highlighted by AM Best

1st September 2022 - Author: Jack Willard

Rating agency AM Bests’ latest reinsurance market report highlights that the global risk environment is continuing to get more complex, notably with traditional nat cat models being subjected to renewed scrutiny due to the increase in the frequency of events in the last five years.

am-best-logoThese events are usually attributable to climate trends, for which scientists do not yet have definitive answers for.

At the same time, AM Best states that secondary perils are becoming more prominent, and therefore, less secondary. By definition, their modelling is less well developed and less accepted. The industry has realized that pandemic-related losses could be more influenced by government intervention, which are virtually impossible to model, than by biometric risks.

In an increasingly digitized economy, the importance of cyber risks continues to grow, but modelling and pricing are still in their infancy. Defining and quantifying what constitutes a systemic cyber event is extremely difficult.

Moreover, one explanation for the lack of re/insurers’ appetite for particular risks is their inability to quantify those risks and determine a reliable technical price, which seems to be exactly the case for natural catastrophe perils.

Stratumn, by SIA Partners

Although over a ten-plus year period, the majority of companies’ technical results genuinely tend to hover around breakeven, the higher frequency of events in the last five years, along with the long-term climate trends affecting them have exerted significant pressure on the level of confidence users put in modelling tools, which is a key component in the pricing process.

Furthermore, AM Best notes that informed uncertainty is at the core of a portfolio of insurable risks. Models help to understand the nature of the perils involved, but due to their overall limitations, they are always going to be imperfect predictors of a technical price.

Another factor that the report explores is the relatively stronger appetite for casualty and specialty lines, and how these lines are not completely immune from accumulation risk, as shown by the COVID-19 pandemic and more recently Russia’s invasion of Ukraine. Major events affecting these classes of risk are generally considered more remote, even when more often than not, it is unclear what that major event may be, and their financial impact seems to be more manageable than that of a natural catastrophe on the property side.

Additionally, pricing has also been rising quite steeply over the last few years, therefore making cyber coverage margins appear more attractive and giving rise to the fear of missing out on a potential profit opportunity.

However, available models are still at an early stage of development. Although they help in better understanding the nature of the risk, attempts at quantification generate a very broad range of outcomes at best.

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