Property cat retrenchment is improving market ‘stability’

Given increased losses from not only natural catastrophe events, but from so-called secondary perils as well, along with the pandemic impacts and economic uncertainty, many global reinsurance companies have shifted their business mix into casualty and specialty primary lines where pricing movement is still positive.

This is according to AM Best, which notes that heightened natural catastrophe activity in 2017 and 2018 became a turning point for attitudes to risk.

“Although the global reinsurance segment was well capitalised, the instability of financial results and inability of most players to meet their cost of capital put the level of investors’ risk tolerance to the test,” said the rating agency in a report.

“This was more immediately evident in the insurancelinked securities (ILS) markets, which after a period of rapid expansion, plateaued and experienced a significant flight to quality when allocating capital. 

”The traditional markets’ risk appetite took a bit longer to move in a similar direction. From 2019, early expectations of rate increases started to attract new capital.

”There was also the hope that natural catastrophe activity would subside and return to more average historical levels. A number of factors have complicated that picture.”

These complicating factors include the attritional loss impact from so-called secondary perils, unexpected or unmodelled events (such as Winter Storm Uri in Texas in the first quarter of 2021) and more climate extremes (including the Central European floods in July 2021).

European reinsurers remain committed to cat risk

In addition, volatility in reinsurers’ results the last few years has been driven not only by traditional natural catastrophe events, but also by the growth of secondary perils, the pandemic, and, more recently, the Ukraine-Russia conflict.

This has been compounded by financial, economic, social, and geopolitical uncertainty in general.

”For the last two years, reinsurers have been shifting covers to higher layers of protection, raising deductibles, lowering limits, adding explicit exclusions, avoiding aggregate covers, restricting specific perils and geographies, and generally becoming more selective with their cedents, to mitigate adverse selection and credit risk,” notes the rating agency.

“All this, at a time when cedents themselves crave for more stable results and have the protection of their balance sheets at the top of their priority list.

”Some companies have been actively shrinking their property cat exposures or even modifying their organisational structures and exiting altogether, although most of the largest European players remain committed to catastrophe risks.”

While remaining more cautious when it comes to risk selection, the longer-term views on catastrophe risks of the larger players tend to be influenced by a much greater risk diversification (including the life and primary businesses), size, and financial flexibility, supported by relatively lower reliance on the currently constrained retro markets.