Editor's comment: The three Rs

Editor's comment: The three Rs

Reserving, run-off and renewals, in this case. Whether or not good or bad times are around the corner for individual reinsurance firms depends on how they score in terms of pricing discipline, and on how their reserves will continue to stand up against increasingly testing conditions.

So this month’s cover asks an important question about the state of reserving in the re/insurance sector. It is a question that will take the fullness of time to answer, but one for which there are historical lessons.

It is still clear from solvency ratios that reinsurers remain particularly well capitalised. Demands from regulators and rating agencies ensure that reinsurers are under strict pressure to keep it that way. Capacity is roughly as plentiful as it was a year ago.

That still needs to erode if the market is to turn. The January renewals proved either that underwriters still think they can afford to renew business at a slight discount, or else they are resigning themselves to taking losses.

Renewals showed that reinsurance rates are still not robust, although firmer than in previous seasons; run-off is meanwhile already enjoying a resurgence in the market; and the soft market has now endured for so long that only the more senior staff members can remember what came before it.

While reserving is never a topic for renewals conversations between underwriters and brokers, its influence is increasingly being felt in the market. Run-off firms have been busily acquiring long-tail legacy business in a lengthening list of deals and transfers. Other re/insurers have either moved to top up their reserves or else seen positive development squeezed in more recent quarters.

Also true is that returns on equity throughout the sector are nothing to shout about. Furthermore, those slimming profits that have been paid out to shareholders in recent years have been made possible only because of reserves releases paid out from previous years’ business that had continued to develop positively.

In January, American International Group (AIG) and Berkshire Hathaway’s National Indemnity Company agreed the biggest reinsurance transfer ever (for more on that deal see page 6). Suffice to say here that the huge legacy deal frees up capital for AIG by relieving pressure on its reserving for its long-tail US casualty exposures.

Rising inflation means higher claims costs for insurers and reinsurers alike, so reserves will be stretched further in coming quarters. Low interest rates only add to the pressure. For reinsurers, their exposures have been rising for lower premiums paid to them, as cedants get more bang for their buck at each successive renewal.

These factors taken together mean reinsurers will struggle to match previous profits to their shareholders. They remain at the mercy of sudden catastrophe events, as well as increasing claims volatility from their longer-tail liabilities. 

For those reinsurance firms that have shown discipline at renewal; that are enjoying reserves in better shape than their rivals; and that might have made intelligent use of run-off to shed a lengthening shadow of long-tail exposures; good times could be around the corner. For the badly behaved class members – not so much.

 

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November 2017

 

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