Dramatic rate hikes and a subsequent hardening reinsurance market following large catastrophe events is a thing of the past, and reinsurers must embrace change and adapt in order to survive in an evolving industry, warns A.M. Best in a new report.
The ratings agency states that the traditional reinsurance market cycle has been replaced by “pockets of microcycles” that are based on geography and loss experience.
Following the impacts of catastrophe events in both 2017 and 2018 and high levels of re/insured losses, A.M. Best notes that overall, the reinsurance sector failed to recognise and price for fundamental changes that altered the landscape of the Florida property market.
A lack of discipline by some and a failure to adequately price for the actual underlying risk hurt certain players, and resulted in the global reinsurance composite recording a five-year (2014-2018) combined ratio of 97.6%, and a return on equity of 6.%.
Following the events of previous years, reinsurance companies have entered into a period of “seismic change”, says A.M. Best, adding that companies that adopt a tactical approach to the repositioning of their portfolios might be better placed to cope with future challenges.
“Like the proverbial ‘generals always fight the last war,’ many reinsurers that allow past performance to shape their expectations of future performance will be the ones more likely to be caught off-guard again,” said associate director, Scott Mangan.
The report, “Global Reinsurance: Fighting the Last War,” explains that in order to benefit from the evolution of the marketplace, reinsurers must embrace change and innovation in their business models. This includes leveraging advanced technology to drive needed change, but importantly, the ratings agency adds that technology isn’t the only answer and highlights cheaper sources of capital combined with more-inventive risk sourcing.
Overall, alternative, or third-party reinsurance capital responded well to 2017 and 2018 cat events and showed its commitment to the global re/insurance space. Alternative capital continues to grow its share of the overall reinsurance market pie, and despite a slowdown in more recent times, it continues to edge closer to the $100 billion mark.
A.M. Best expects this trend to persist in 2019, but states that it is concerned that “supply-demand considerations drove the underwriting discipline as much as the pricing models, and therefore fear that overcapacity could push pricing to irrational levels again.”
Both traditional and alternative markets have been pushing for rate increases through 2019, and following a more meaningful price response at the mid-year renewals, it will be interesting to see how sustainable this momentum is heading into 2020.
A.M. Best has maintained its stable outlook on the global reinsurance sector, which primarily reflects a more stabilised, non-life pricing environment, and also a stable market environment in global life reinsurance.
“Going forward, particularly for non-life reinsurers, the question is whether the lessons learned will result in any meaningful and sustainable change in the market,” says A.M. Best.
