Despite the fact more capital inflow to the insurance-linked securities (ILS) sector is expected and more new start-up capital is expected to launch in traditional insurance and reinsurance, rating agency AM Best does not expect this to affect the chances of additional rate firming happening.
In a recent analyst report, AM Best said that while capital remains a factor in rates in the ILS and reinsurance market, it does not expect underwriters desires for better returns to be swayed and anticipates a continued push for higher prices.
Loss activity reinforces this, with the industry looking at another above-average catastrophe loss year, while fears of inflationary effects continue to bring caution and a drive for more rate.
AM Best is encouraged by how recent capital influxes into reinsurance have been managed.
On the start-up companies of 2020, AM Best noted that, “the impact of new entrants has been modest thus far.”
“New business has been written opportunistically, sometimes in niche areas that would otherwise have been subject to dislocation,” the rating agency said, which is one reason that despite fresh capital coming in, it has not all been targeted on property cat risks, for example.
This time, the push for rate, is different, AM Best believes. A view that is increasingly widely held it seems, as those who read our coverage will be aware.
“Unlike previous pricing cycles, we see no signs of a material erosion of capital this time,” AM Best said.
Adding that, “Rate pressures stem from a sustained underperformance for several years in a row.”
Further explaining that, “New capital influx arises owing to both improving market conditions and a lack of other attractive investment opportunities.
“Balance sheets remain strong, but capital is still being deployed judiciously.”
The rating agency expects further new start-up capital will come into the market over the next 12 months. We’d imagine AM Best may already be seeing new business plans for companies aiming to enter the specialty insurance and reinsurance sector.
But, despite all of the interest in sourcing risk-linked returns and capitalising on the improving market conditions, AM Best said, “We do not see any signs of naïve capital or a softening market.”
As a result, “We expect firming pricing conditions to continue at least for this year and next,” AM Best said.
Adding that, “These fundamentals should remain in place while companies demonstrate their ability to meet their cost of capital.”
That’s the key here, as capital is not naïve, as AM Best said, which means those deploying it must be able to demonstrate that they can deliver on its return requirements.
The only market segment that has softened is really the catastrophe bond market, but given multiples at market remain at levels not seen for a few years, while can bond investors have always exhibited an efficient capital-cost, that’s perhaps not surprising, especially given the investor interest in the cat bond sector.
It doesn’t necessarily mean capital is beginning to look at all naive in that space, the managers of it are very sophisticated. But there is going to be a need to demonstrate that the cat bond market knows where its limits on pricing are too, something we’ve seen through some recent issues, where pricing falls are less evident with new cat bonds.
That should help to keep pricing momentum moving in the right direction at least, even if further inflows may result in that momentum slowing over time.