Quantitative reinsurance underwriting supports price discipline: A.M. Best

There is evidence that the “very quantitative” approach of the reinsurance and ILS market to underwriting peak catastrophe risk business is helping to support pricing discipline, according to rating agency A.M. Best.

When discussing the state of the market at recent reinsurance renewals in a new report on London market re/insurers, A.M. Best notes that discipline is becoming increasingly apparent.

As evidence of this the rating agency cites two factors; the fact that alternative capital in insurance-linked securities (ILS) only grew by a modest amount at the mid-year 2016 renewals, as well as the growing evidence of underwriting discipline.

“At the half year, A.M. Best noted that there was only a modest increase in the supply of alternative capital and there is evidence that the market’s very quantitative approach to underwriting peak catastrophe business is supporting pricing discipline,” the rating agency commented.

However, despite this evidence of discipline, “reinsurance rates declined overall” at the U.S. property catastrophe focused June and July renewals, A.M. Best said.

This enabled ceding insurers to derive further benefits from the market, including “improvements in terms and conditions, such as expansion of hours clauses, with programmes placed early generally able to achieve the most favourable terms.”

But, pricing is showing signs of holding up better now, supported by discipline in terms of new capital raised to be deployed in the ILS market and the quantitative approach to underwriting shown by the reinsurance market more generally, and “The pace of rate deterioration is slowing, especially for the higher layers of programmes,” A.M. Best noted.

Companies have been performing well, despite the pressure on rates, but much of this has been due to the lower than normal catastrophe loads that have been dealt with by the reinsurance industry over the last few years.

This recent good performance is “unsustainable”, A.M. Best explains, with issues such as reserves, expense ratios and the like all expected to come to the fore when catastrophe losses tick up, or a truly major catastrophe event hits the market.

“In the near term, maintaining underwriting discipline in a softening market is the key challenge,” the rating agency says.

Perhaps aligned with the mention of discipline being evident in the quantitative approach to underwriting, A.M. Best also said that “Companies with sophisticated analytics to support capital allocation, as well as the ability to move quickly in and out of individual business lines in response to premium and claims trends, are more likely to emerge in a strong position.”

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