Capital Management Helps Reinsurance Sector Weather Catastrophes

2011 Thailand floods (credit: AP) 2011 Thailand floods (credit: AP)

NU Online News Service, April 23, 1:46 p.m. EDT

The global-reinsurance market ended 2011 with the about the same amount of capital it started the year with, despite significant catastrophe events.

The fact “speaks to the strength of the segment’s risk-management capability and the market’s resilience to withstand and rebound from live-stress events,” says ratings agency A.M. Best Co. in a special report on global reinsurance.

Only 2005—with hurricanes Katrina, Wilma and Rita—produced more cumulative insured-catastrophe losses ($125 billion) than 2011 ($110 billion).

Global-catastrophic events in 2011 caused about $50 billion of losses for the global-reinsurance sector, says A.M. Best. Yet, to many reinsurers, 2011 “amounted to nothing more than a negative-earnings event.”

The market has therefore not experienced a broad hardening. A.M. Best says advancements in enterprise risk management and modeling have allowed the sector to develop more accurate risk tolerances and take a more conservative view of risk. Additionally, reinsurers put themselves through stress tests to gauge effects on capital. The ratings agency says reinsurers generally maintain a strong capital cushion to appease ratings agencies’ concerns following an event and keep financial flexibility.

Results among reinsurers have also benefitted from favorable reserve developments on prior years. These reserve releases continued in 2011 to soften the effects of catastrophe losses, but they could not exceed underwriting losses.

A.M. Best says the perception of risk is evolving among primary insurers. Right now, some primary carriers are purchasing reinsurance based on budgeted dollars amount rather than exposure.

“This pattern of behavior has muted a more dramatic increase in pricing, but a day of reckoning could be coming,” A.M. Best suggests.

Reinsurers are seeking rate increases when uncertainty is prevalent. After all, areas such as Thailand, New Zealand and Australia were not considered zones for high losses. 

Overall, A.M. Best says increasing demand has helped to push rates up for property-catastrophe-related business and pricing in casualty classes have hit bottom. The ratings agency believes these factors “will support a low double-digit return on equity in 2012 and continue to support reasonable organic growth in capital, assuming a normal level of global catastrophe losses.”

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