Prolonged market hardening to offset reinsurers underwriting losses, COVID-19 impact: report

Hardening pricing conditions are creating opportunities and helping reinsurers offset the negative market forces driven by COVID-19, social inflation and exposure to previous catastrophe events, according to AM Best. Property catastrophe, specialty lines and some US casualty lines in particular are showing...

...much-needed improvement in pricing and coverage terms, the agency said. However, it warned that the positive market momentum may turn out to be short-lived and excess capacity may start expanding again.

AM Best believes that the market hardening must be sustained for long enough to offset the impact of prior underwriting losses, as well as the uncertain impact of COVID-19, which likely is to have a long tail due to legal disputes.

"If reinsurers do not sustain stronger pricing, they risk losing investor confidence," it said.

The report also noted that although the ultimate impact of the pandemic remains to be seen, some reinsurers appear better positioned than others to adapt and take advantage of these market conditions. But, overall, it believes that the sector as a whole should be able to manage this challenging yet promising market environment.

"After three years of significant industry losses, those companies with a solid financial strength, robust reputation and market position, as well as stable, consistent and transparent results, should be best-positioned to optimize their underwriting risk portfolio and continue to attract and deploy capital," AM Best said.

The global reinsurance composite has produced a five-year (2015-2019) average combined ratio of 99.6 percent and a return on equity of 5.7 percent, according to the agency. It said 3-4 percentage points of that combined ratio performance is attributable to favorable loss reserve development, a benefit that continues to diminish. Without prompt, corrective action, that will create a drag on earnings.

AM Best noted that, despite the COVID-19 pandemic, the catastrophe bond segment of the insurance-linked securities industry rebounded during the first half of 2020. However, considerably higher delinquency rates in the second-quarter 2020 reflect the pandemic’s ongoing strain on the reinsurance segment’s mortgage-related activities, it added.