Property and casualty reinsurers find themselves in a changing market as they enter the post-pandemic recovery, AM Best believes.
Higher rates have enticed new players to try their luck in this market segment, propelled in particular by the influx of new capital to support them. The most attractive risk tranches are clearly identified and competition is intensifying to capture market segments with higher profit margins.
Reinsurers are thus focusing on revising their risk portfolio to make it more balanced or to increase their market share at the competition’s expense. The snag, AM Best points out, is that it no one knows if the reinsurer's pie will grow in the short term.
“As societies struggle to return to some sort of normalcy in the middle of an ongoing pandemic and intangible assets increase as a share of the worldwide economy, risks are becoming more difficult to measure and manage. On top of that, in a more interconnected economy—resulting from both globalization and technology—correlations shoot up dramatically in times of crisis, making risks systemic. The world overall faces more risk. In their current form, those risks may not meet the conditions to be considered insurable, given that technical prices would be prohibitive,” the rating firm said in a report titled Global Reinsurance Outlook Remains Stable in a More Uncertain World.
The AM Best rating analysts say that reinsurers will need to be flexible and innovative to remain relevant in the economic stratosphere. “A higher share of uninsurable risks—because they are considered non-measurable, non-manageable, or systemic— translates into a smaller role for the (re)insurance industry. Company-specific risk modeling and data will be essential for a better understanding of risks. Only the most innovative players may be in a position to succeed. Differentiation and innovation in product design should be critical to cover emerging and evolving risks," the report reads.
What will innovation involve?
According to AM Best, innovativeness will entail slicing and dicing the different components of a risk. This will allow reinsurers to contribute to broader participation of capital markets depending on investors’ appetite. Reinsurers may need to consider “closer cooperation with governments, to mitigate, identify, and isolate the most systemic elements of risk and transfer them to bespoke, publicly sponsored platforms" the report continues.
The rating firm points out that the reinsurance industry has always been able to deal with the challenges posed by natural disasters, low interest rates and strong competition. “Despite these challenges, it has always met its claims-paying ability,” the rating firm said.
More capacity available
AM Best also notes that reinsurers' capacity rose by US$35 billion from 2019 to 2020, a 7 per cent increase, also surpassing the US$500 billion mark. By the end of 2021, the rating firm expects reinsurers’ available capital to grow by 3 per cent. This upward trend should continue over the next few years.
