Reinsurers Find Stability with Shift from Property Catastrophe Risks

Reinsurers are seeing more stable and improved results as they move away from property catastrophe risks, according to a new report from A.M. Best.

The Best's Market Segment Report, "Global Reinsurance: More Stable and Improved Results Follow Shift from Property Catastrophe Risks," notes that increased natural catastrophe losses along with secondary perils, the impacts of the COVID-19 pandemic, and economic uncertainty have prompted many global reinsurers to move their business mix more toward casualty and specialty primary lines.

According to Best's report, a higher frequency of catastrophe events over the past year is putting pressure on confidence in the modeling tools used in the reinsurance pricing process. At the same time, reinsurers are finding actions of governments to control inflation are affecting market conditions, Best said.

"One of the reasons behind the abundance of capital was the low interest rate environment," Carlos Wong-Fupuy, senior director at A.M. Best, said in a statement. "Now that central banks are trying to control inflation, capital is becoming tighter, recession fears loom, and asset valuations declines are hurting balance sheets in a way that catastrophe losses thus far have not been able to."

The rating agency said that even with rate increases, most reinsurers see current property catastrophe prices as insufficient to compensate for the level of uncertainty. Meanwhile, casualty and specialty primary lines are seen as more attractive as they create comparatively more stable, predictable patterns.

"Social and economic inflation remain an issue, but current margins embedded in the pricing reward reinsurers adequately for the risk taken," the Best statement said.

In addition, the long-term nature of casualty lines offers reinsurers the opportunity to generate investment returns while significantly reducing liquidity risk, the rating agency said.

"Although casualty and specialty lines are not immune from accumulation risk, as seen in major events such as the pandemic or the Ukraine invasion, they are considered to be more manageable and less frequent compared with a natural catastrophe on the property side," Mr. Wong-Fupuy said. "Secondary perils also have become more prominent than ever."

Best said it still views the global reinsurance segment as very well capitalized and disciplined, and it's maintaining its stable outlook for the segment.

Copyright © 2022 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED.