There’s been a decline in the positive contribution from reserve releases on combined ratios for reinsurers, and as inflation remains relatively elevated in US markets, further reserve strengthening is expected, according to Greg Carter, Managing Director, Analytics, AM Best.
Speaking earlier this week during AM Best’s Europe Insurance Market Briefing in London, Carter discussed industry reserve releases and warned that the reinsurance sector’s net position is likely to move into negative amid the high inflation environment.
He explained that between 2013 and 2017, there were times when the benefit of reserve releases contributed positively on the combined ratio to the tune of 5% or 6%. However, between 2018 and 2022, this benefit has come down, reaching a high of a 4.2% positive contribution in 2021, but a low of 1% in 2019 and then also just 1.8% in 2022.
“So, we’ve seen a decline in that, and in the course of the last 12 months, we’ve seen a number of the major players set aside additional reserves or strengthen reserves, specifically in relation to inflation,” said Carter.
Inflation in most markets, notably those most influenced for the reinsurance sector, does not seem to be declining very quickly. Carter noted that while the Eurozone does appear to be making some progress, in US markets, inflation is still relatively high.
“It’s clear that it’s going to take longer to get inflation down to Central Bank targets,” warned Carter.
“So, I think we will see a trend of further reserve strengthening, reflected in response to inflation. And I wouldn’t be surprised to see the net position for the industry move into a negative. So, having to strengthen reserves overall,” he added.
As third quarter 2023 results continue to filter in, there’s been some notable reserve strengthening from certain players, including the likes of Swiss Re, who bolstered its P&C reinsurance casualty reserves in the quarter as a result of “more pessimistic assumptions of ultimate loss cost.”
The chart below, provided by AM Best, shows combined ratios and favourable reserve development between 2018 and 2022.
