AM Best Believes in Global Reinsurers
By Marius | Published April 26, 2012
The global reinsurance industry looks set to rebound, with rates rising to offset some of the worst quarters ever for catastrophe losses following an unprecedented series of natural disasters in 2011 which included, amongst other events, severe flooding in Thailand last year and record earthquakes in Japan and New Zealand. New research data released this past week by insurance market analyst firm A.M. Best Co. notes that the financial positions of international reinsurance companies have remained largely resilient in the face of these challenges, and that positive market trends in the coming months should enable the industry to recover and prosper in the future.
In AM Best’s special report, available here, the firm observed that the global reinsurance industry managed to end 2011 with around the same amount of capital it started with, even though uncertain economic conditions and frequent and significant loss events struck key markets throughout the year. All in all, natural disasters and other catastrophic events cost the global reinsurance sector about US$50 billion in losses during 2011, although to many reinsurers this exposure amounted to little more than a negative earnings event. This fact, according to the ratings agency, demonstrated both the strength of individual reinsurance companies’ risk-management capacity as well as the overall resilience of the marketplace to withstand and rebound from such devastating events without any further dislocation or squeeze on capacity. Furthermore, the report added that 2011’s severe loss events had no reciprocal effect on the rate renewals occurring in January and April this year, which were described as suitably organized and timed. Global reinsurance companies have been able to negotiate better pricing terms and conditions for property and catastrophe (p&c) cover and the broader market has benefited from this stability. AM Best noted that the continued supply of reinsurance capacity in the aftermath of these catastrophic events has enabled pricing to remain generally flat across most other global insurance lines.
According to AM Best’s report, few reinsurers experienced higher losses than they could tolerate last year due to the valuable lessons the international insurance industry learned from 2005, which still holds the record for costliest year thanks to hurricanes Katrina, Rita and Wilma, and a combination of other catastrophic events, that cost insurance company underwriters about US$125 billion in losses. Private and public sector enterprises have worked hard since then to bolster their reinsurance risk management strategies and implement more prudent capital and enterprise risk management tactics. Best also noted that the global reinsurance sector has traditionally been more proactive than its other insurance business counterparts in adopting and developing new risk modelling systems, as they have avoided dependence on any one risk model and frequently tested for proprietary catastrophe situations. “This has tended to result in a more conservative view of risk,” AM Best noted.
These more conservative management strategies, combined with a renewed regulatory interest on solvency margins, have worked to ensure that those within the reinsurance industry regularly test the impact of catastrophe losses on clients across the world. As a result, reinsurance companies have tended to hold a capital cushion well in excess of these tests in order settle ratings agency concerns following a severe loss event and keep financial flexibility; this has been a boost to the market’s overall resilience. AM Best noted that the positive effects of this excess capital cushion could first be seen in the aftermath of the 2008 global financial crisis. Reinsurers were largely able to withstand this decline in capacity and asset values, and didn’t require any further bailout or consolidation efforts to adjust to new market realities.
AM Best went on to state that, in addition to changing reinsurance management attitudes, the technology involved in determining risk exposure and preparation strategy has continued to evolve as well. The report credited the advances made in catastrophe and economic capital modelling schemes in particular with reducing unnecessary loss exposure and improving the overall pricing environment in tow. These tools, according to AM Best, “significantly helped a reinsurer’s ability to better allocate capital within complex risk portfolios. The models, while not perfect, helped keep both individual and cumulative losses in 2011 within stated risk tolerances for most of the global reinsurers,” Best said.
Going forward, the international reinsurance industry is only expected to improve upon its efficiency as risk management practices further evolve. Recent catastrophic events in the Asia Pacific region have only further highlighted this trend. Historically, international reinsurance companies tended to avoid focusing on countries like Australia, New Zealand and Thailand, classifying them as non peak zones. These zones have not been traditionally prone to significant losses and were not expected to produce them in the future, and as such were often underwritten at lower margins in relation to peak zones elsewhere. Now, after the Bangkok floods, Cyclone Yasni and the Christchurch earthquake, those presumptions have quickly changed, and reinsurance companies have responded by reallocating capacity and demanding higher rates to cover these areas. These moves, combined with increased regulatory pressures on solvency margins appear to have driven up reinsurance demand again, especially in loss-prone areas around the world. Reinsurers naturally seek rate increases when uncertainty is prevalent and with natural disasters now apparently more widespread than ever, their risk portfolio can grow.
AM Best believes that recent events have indeed triggered an increased focus on the value of coverage and this could be the lift the reinsurance industry needs. While demand for reinsurance services had fallen over the past five years, the recent spike in global catastrophe activity has reaffirmed interest among primary insurers and has helped push rates up for reinsurance while pricing in casualty classes remains flat. In conclusion, the report indicates that the confluence of these two factors “will support a low double-digit return on equity in 2012 and continue to support reasonable organic growth in capital, assuming a normal level of global catastrophe losses.”
Ratings agencies have long recognized catastrophic events as a key threat to the solvency of both reinsurers, and property and casualty insurers, due to the often unexpected and severe nature of these losses. Global socio-economic trends over the past decade have pushed property values and concentration risk in catastrophe-prone areas upwards, and insured exposure has escalated rapidly in tow. As more and more people and businesses inhabit risk prone areas, insurance companies must take on more responsibility to provide coverage against a wide array of risks, including newfound risks like terrorism. Natural disasters, however, will always be one of the best reminders to prospective clients to have adequate protection against catastrophic loss. As the worldwide insurance industry’s exposure to catastrophe losses continues to rise, solutions need to be found. Luckily it appears as if the reinsurance trade is on the right track.
A.M Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors.