A recent AM Best report suggests that there is a stable pattern of underwriting profits as companies are becoming more proactive about making explicit allowances for inflationary trends. Numerous business re-alignment initiatives have been taking place over the last three years.
In addition to price increases and more restrictive covers, the focus has been on de-risking portfolios, moving away from volatile lines of business such as property catastrophe, or large corporate accounts in the case of casualty lines.
As insurers work to strengthen profit margins, their efforts to become more cost-efficient have also been evident.
The pandemic has provided an opportunity for reinsurers to streamline operational practices, says the report, such as cutting back on business travel and lowering costs.
The report notes that the impact of these measures has taken some time to manifest. The pandemic also complicated the picture somewhat, with the need to book a sizeable amount of incurred but not reported claims (IBNRs).
In 2023, the global reinsurance segment generated a combined ratio below 100% for the first time in five years.
This is not just the result of lower loss ratios despite a sequence of property catastrophe events, expense ratios have also declined consistently over the last five years.
Bottom-line results have benefitted from solid investment returns each of the last five years, as well as improved prices, and from reserve releases that started recovering gradually from their lowest point in 2019.
AM Best expects combined ratios to hover around 95% for 2022, assuming a normalized catastrophe burden.
Given the de-risking of most companies, cat loadings are expected to compress materially and help lower volatility. Even with a major cat event, exposure reduction and more restricted covers should help protect most balance sheets, says the report.
Expense ratios may continue to fall, and the impact of reserve releases is likely to stabilize. However, depending on the asset mix, investment results should decline materially from previous years, and may even turn negative, pressuring bottom-line results.
Claims cost inflation not captured in previous underwriting years could still exceed the margins in the more conservative reserving approach of the last five years.
by Yana Keller