The tough reinsurance market is not going away – AM Best | Insurance business America
It is said that the industry is plagued by difficulties
reinsurance
By Kenneth Araullo
The reinsurance industry is currently in a tough market and is generating risk-adjusted returns at levels not seen since 1993, according to a report from AM Best.
This cyclical change, often triggered by significant underwriting losses and surplus erosion, has improved the prospects of many reinsurers. Typically, a major loss initiates the transition from soft to hard pricing cycles, attracts investors seeking to benefit from stricter underwriting conditions, and leads to the creation of newly formed reinsurers.
According to the credit bureau’s findings, these new companies often merge or are acquired when the market eventually weakens and balance between supply and demand is restored.
Historical events such as the Glarus fire (1861), hurricanes Hugo (1989), Andrew (1992) and Ike (2008), as well as September 11th and the trio of hurricanes Katrina, Rita and Wilma in 2005 have brought about significant changes in the world Reinsurance market. Traditionally, these events led to the creation of reinsurers that became market leaders.
However, AM Best noted that the current tough market, which began around 2017, has not seen the same emergence of new reinsurers.
According to the company, since 2017, increased property catastrophe activity and an increase in secondary perils have led to improvements in reinsurance pricing and contract terms. Despite a slowdown in the rate, these trends continued until the June 1, 2024 renewal. Rising interest rates in 2022 caused volatility in the capital market and resulted in mark-to-market losses, which significantly reduced the available capital in the industry.
While these capital losses were viewed as temporary, the need for higher underwriting returns to offset increased risks resulted in a chaotic reinsurance market. A widening gap between the expectations of reinsurance sellers and buyers has resulted in a persistently tough market that is expected to last until at least 2025, AM Best reported.
What makes this tough market different?
This hard market is different from previous ones because it was caused not by a single major loss, but by a series of property catastrophe events that resulted in significant underwriting losses. From 2017 to 2021, low interest rates led to an overabundance of capital, prompting reinsurers to drive business growth, resulting in a decline in margins and bond points.
The situation changed in 2022 when rising interest rates forced the industry to reassess its insurance positions, resulting in significant mark-to-market losses on reinsurers’ balance sheets. AM Best noted that these losses were generally viewed as temporary due to the short duration of fixed income investment portfolios.
Despite the ongoing tough market and significant changes in market conditions, no new reinsurers have been created to take advantage of the opportunities. Several high-profile management teams announced intentions to launch new reinsurers, and there were rumors that many more were seeking funding. However, according to AM Best, none have progressed past the fundraising stage.
The current difficult market is expected to continue for several years and prices and conditions are unlikely to ease any time soon. The industry must continue to address the challenges presented by increasing disaster activity and changing financial conditions.
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2024-07-04 13:40:00
www.insurancebusinessmag.com
