AM Best: Reinsurers Shifting Business Away from Property to Casualty and Specialty Lines

According to a new AM Best report, insurers are shifting their business mix away from property and toward casualty and specialty lines due to uncertainty.

Source: Advisen - Alex Zank | Published on August 18, 2022

AM Best on stress testing

"Although casualty and specialty lines are not immune from accumulation risk, as seen in major events such as the pandemic or the Ukraine invasion, they are considered to be more manageable and less frequent compared with a natural catastrophe on the property side,” Carlos Wong-Fupuy, AM Best senior director, said in a statement. “Secondary perils also have become more prominent than ever.”

Despite rate increases, most reinsurers believe that current pricing on property catastrophe risks is insufficient given the level of uncertainty. Reinsurers are looking into the limitations of traditional modeling for secondary perils, pandemic-related claims, and more frequent and destructive disasters.

Casualty and specialty line modeling may not be as robust as property CAT modeling, but claims patterns in those lines are more stable, according to the report. Some businesses have altered their organizational structures and stopped covering CAT-related risks entirely.

According to the report, reinsurers' appetite for cyber risk is "perhaps the most obvious case" for growing risk appetite despite a lack of robust modeling. Sharp price increases make cyber coverage margins appear appealing, making some reinsurers fearful of missing out on a profit opportunity. However, modeling is still in its early stages. According to AM Best, exposure management is primarily based on coverage limits.

The rate of increase in reinsurance rates for property CAT exposures appears to be accelerating. Between January and July, Guy Carpenter calculated a 15% increase in its U.S. property CAT rate-on-line index, the highest since 2006. The recent sharp increase, however, is dominated by Florida market renewals, which are "not necessarily a good indicator" of the rest of the market due to its unique situation, according to Best.

According to another report, total reinsurance gross premium written (GPW) increased 9.8% to $353 billion last year, according to AM Best. This is best noted in another report. Many reinsurance companies reported that pricing increases, rather than exposure growth, accounted for one-third to half of their premium growth.

AM Best estimates place combined ratios in the 95% range in 2022, assuming a normalized CAT burden.

It also anticipates that reinsurance rate increases will continue for many lines of business next year, though the rates will vary by line of business and territory. Growth could be offset by decreases in property CAT reinsurance premiums as a result of reinsurers reducing or withdrawing from that market.

According to GPW, Munich Re will continue to be the largest reinsurer in 2021. Munich Re's 10.8% annual GPW growth was driven by the expansion of its P/C segment. Its P/C segment growth was not restricted to a single region or business line.

Swiss Re, Hannover Rück SE, Canada Life Re, and SCOR SE rounded out the top five. Swiss Re experienced growth in both its P/C (8%) and life and health (7%). Price increases drove P/C growth. Canada Life Re jumped from eighth to fourth place in 2020, the first time a solely life reinsurance group cracked the top four.

For the first time in five years, the average combined ratio of the 50 largest companies fell below 100%. The top ten's average combined ratio was 99.2%, down from 104.9% in 2020. The top 15 non-life reinsurance groups had a combined ratio of 98.5 on average.