Favourable reserve development is expected to continue, but there is still inflation to contend with, warns AM Best

Despite elevated catastrophe activity, AM Best’s composite of US and Bermudian reinsurers posted an improved underwriting margin in 2021, with a minimal number of COVID-19-related claims and larger contribution from investment results.

Its population of US-Bermudian reinsurers posted a combined ratio of 95.8% in 2021, representing a six-percentage-point improvement over the prior year. Reserve releases trimmed 6.1 points from the combined ratio, compared with 3.3 points in 2020.

Favorable reserve development is expected to continue, as COVID-19 claims development has been less than expected.

“Optimism regarding reserve redundancy for recent accident years should be tempered by recognising that the current spike in inflation could continue for a prolonged period, which could undermine projections for severity trends in long- or short-tailed business lines,” said Gregory Dickerson, associate director, AM Best.

Capacity remains ample in many business lines, although underwriters remain particularly cautious about Florida exposure, due to concerns about long-term structural issues in the tort system that appear unlikely to be resolved in the near to medium term.

Hard market to continue

However, the pricing environment for property catastrophe risks is improving.

Net premiums written grew by a robust 20% in 2021, benefiting from the significant rate improvements. AM Best projects that premiums for the composite will further increase in 2022, as demand has proved resilient, and rates in most key business lines continue to rise, albeit at a slower pace.

Additionally, given the ongoing improvement in reinsurance pricing, terms and conditions, as well as the quiet Atlantic/Gulf Coast hurricane season thus far in 2022, the composite should be able to improve upon its combined ratio assuming that catastrophe losses in the second half of 2022 are not excessive.

At the same time, US and Bermudian reinsurers are focused on growing their specialty and casualty portfolios, particularly in the excess and surplus markets, where pricing is viewed as well in excess of loss cost trends.

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