Reinsurers tamed volatility on nat cat retreat, but can’t avoid unknowns

Global reinsurers are largely succeeding in their quest to tame earnings volatility with greater portfolio balance and a reduction of property cat, but may be moving into lines with equally unknown or under- modelled perils, analysts at  AM Best said in a sector report.

"Given the de-risking of most companies, cat loadings should compress materially and help lower volatility,” analysts wrote of the state of play. “Over the medium term we are likely to see a more stable patter of underwriting profits.”

Combined ratios for global reinsurers should “hover around 95%” in 2022 if cat loads don’t surprise. Such as result would be only the second straight year below 100% after a long string of technical losses highlighted by major cat events in 2017 and beyond, they noted.

“Even with a major cat event, exposure reduction and more restricted covers should help protect most balance sheets,” analysts wrote.

The current upswing for reinsurers has been a more balanced and nuanced rise than prior unambiguous market hardenings capable of attracting fresh capacity en masse.

The risk array outside of property cat is not entirely unambiguous, AM Best analysts warned, keeping some players cautious and others away.

“The global risk environment continues to get more complex,” analysts said.

Available capital could slide in 2022 after a 2021 gain. “Based on conservative estimates, we may see a return close to the levels observed at the end of 2020.”

Traditional nat cat models face “renewed scrutiny” as climate-driven alterations in frequency challenge the science behind primary risks and expose lingering shortfalls in the grasp of ever-more-prevalent secondary risks.

Elsewhere, reinsurers can really only step into the comparatively unknown. New fields like cyber show “modelling and pricing in their infancy.”

Casualty and liability, the focus of reinsurers focused on rebalancing, is not only more potentially more affected by inflation, given the long-tail nature, but may face a potentially larger flock of black swans.

“Major events affecting these classes of risk are generally considered more remote, even when more often than not, it is unclear what the major event may be,” analysts wrote. Covid-19 and the first land war in Europe in over 70 years have not apparently caused deeper reflection.

Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.