AM Best has maintained its market segment outlook on the global reinsurance industry at stable for 2021, citing factors that include positive pricing momentum, combined with tighter terms and conditions, offset somewhat by uncertainty with regard to claims reserve development associated with previous years’ property catastrophe events; social inflation; and more recently, business interruption and casualty lines, related to COVID-19.
In its new Best’s Market Segment Report, “Market Segment Outlook: Global Reinsurance,” AM Best states that the current market hardening likely will need to continue for at least a couple of years to have a meaningful impact on the segment. Additionally, pricing momentum will have to be sufficient to offset losses from previous years, including the impact of COVID-19 and ongoing impact from social inflation. At the same time, the improving pricing environment and market discipline, the re-assessment of the role of third-party capital providers following the impact of loss creep and trapped collateral, as well as the ongoing stability in the global life reinsurance segment, are viewed as positive factors.
The COVID-19 pandemic has added more uncertainty to a segment that has experienced increased loss activity in recent years. As a result, reinsurers’ ability to rely on favorable prior-year reserve development has been diminishing steadily. Although the robustness of modeling for the best-understood risks—such as U.S. hurricanes—is being called into question, the incidence of risks that are more difficult to model—such as wildfires, cyber or pandemics—continues to grow. The life segments of global reinsurers have reported negative impacts on profitability due to COVID-19-related claims for the first nine months 2020. However, this impact is typically much smaller in magnitude than it is for their non-life books of business.
AM Best’s most-recent estimate of dedicated reinsurance capital exceeds the USD 470 billion at year-end 2020, including approximately USD 85 billion of third-party capital, a figure that has stabilized after several years of rapid expansion. Third-party capital inflows had been driving excess capacity and contributing to reinsurers’ struggle to meet their cost of capital; however, rising frequency and claims amounts have disrupted those dynamics, and issues related to trapped capital and loss creep are forcing some third-party capital investors to re-assess their positions. AM Best also has noted a number of capital-raising initiatives this year, as well as the entrance to the market of several startups expecting to benefit from the pricing momentum. The new market entrants, while significant in size individually, are unlikely to shift pricing trends for the market as a whole.
Not all companies will be able to take advantage of improved market conditions. Business mix and recent underwriting performance by line of business are key, and the flight to quality is likely to play a role. Financial strength, reputation, market position, product diversification, healthy balance sheets and consistent and transparent underwriting performance may prove to be the differentiators between winners and losers.
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