The PCIF presents a timely and convenient option for local insurers as the appetite of foreign reinsurers shifts from property CAT risks to other more stable and manageable lines as discussed at length in the two related articles. The shrinking cat treaty market may just be the final driver to convince more companies to participate in the PCIF.
It is also worth taking another hard look at the benefits of the PCIF. Apart from providing an automatic proportional capacity, the facility presents the opportunity to leverage on the retentions of the Philippine companies and on global reinsurance costs due to economies of scale and better data. From the perspective of sustainability, the facility aims to Increase the catastrophe resilience of the Philippine insurance industry and provide the public with more inclusive access to catastrophe insurance protection.
1. Reinsurers see more stable and improved results in shift away from property CAT risks
Many global reinsurance companies have shifted their business mix into casualty and specialty primary lines where pricing movement is still positive, according to a new AM Best report.
The shift was prompted by increased losses from not only natural catastrophe events, but also by so-called secondary perils, along with the COVID-19 pandemic impact and economic uncertainty.
The Best’s Market Segment Report, “Global Reinsurance: More Stable and Improved Results Following Shift from Property Catastrophe Risks”, released ahead of the Rendez-Vous de Septembre in Monte Carlo, says that a higher frequency of catastrophe events in the last five years is exerting significant pressure on the level of confidence users put in modelling tools, a key component in the pricing process.
In addition, reinsurers are finding that not only the underwriting environment has become less predictable, but government action also has had a huge impact on market conditions.
“One of the reasons behind the abundance of capital was the low interest-rate environment,” said Mr. Carlos Wong-Fupuy, senior director, AM Best. “Now that central banks are trying to control inflation, capital is becoming tighter, recession fears loom and asset valuation declines are hurting balance sheets in a way that catastrophe losses thus far have not been able to.”
Even with rate increases, most reinsurers view current pricing on property catastrophe risks as still not high enough to compensate for the ongoing level of uncertainty, whereas casualty and specialty primary lines are more attractive as comparatively, they have more stable, predictable patterns.
Social and economic inflation remains an issue, but current margins embedded in the pricing reward reinsurers adequately for the risk taken.
The AM Best report also notes that the long-term nature of casualty lines provides the opportunity to generate investment returns and dramatically reduce liquidity risk.
“Although casualty and specialty lines are not immune from accumulation risk, as seen in major events such as the pandemic or the Ukraine invasion, they are considered to be more manageable and less frequent compared with a natural catastrophe on the property side,” said Mr. Wong-Fupuy. “Secondary perils also have become more prominent than ever.”
AM Best still views the global reinsurance segment as very well-capitalized and disciplined. A number of re-alignment initiatives have been taking place for at least the last three years, and although the pandemic slowed the results of those efforts, the global reinsurance segment generated a combined ratio in 2021 that was below 100% for the first time in five years, at 96.4%, with a return on equity of 9.2%, compared with 2.3% in 2020.
Carriers continue to invest significant resources to address the rapidly evolving risks that they face, and most highly rated companies have demonstrated the ability to adapt their business plans to changing market conditions and generate sustained profits.
Reinsurers remain innovative due to their level of sophistication in risk selection, pricing, product development and capital management.
For these reasons, AM Best is maintaining its 'Stable' market segment outlook for the global reinsurance industry. At the same time, AM Best recognizes that the strength and relevance of each driver underpinning the outlook remains in flux, with business profiles shifting to reflect the growing complexity of the risk environment at a global level.
Mr. Wong-Fupuy said, “The balance between the volatility of recent experience and perceived margins embedded in current rates is what determines risk appetite. For certain types of risks, such as natural catastrophes, that recent volatility has become either too onerous, or for some reinsurers, unacceptable.”
2. TMK exits treaty reinsurance following strategic review
Tokio Marine Kiln (TMK) is to cease underwriting all treaty reinsurance business from 1 September due to poor performance of the portfolio and “challenging market conditions”, Insurance Insider can reveal.
In an internal memo seen by this publication, the company said it is “in discussions” with its treaty reinsurance teams in London and Singapore about their future with TMK, including potential employment elsewhere in the firm.
The traditional Kiln business was previously known for being a reinsurance and binders-focused leader in the market, but this position has been scaled back significantly.
TMK was still known as a leader in the US cat treaty market, but CEO Brad Irick outlined in a January interview that the overall reinsurance book accounted for less than 10% of the carrier’s portfolio.
The move comes amid widespread industry concern about the profitability of property reinsurance, particularly cat business, due to which a number of reinsurers have reduced their appetite.
In June, Axis Re shocked the market when it announced it would discontinue its $700mn property reinsurance book, comprising both its cat and non-cat portfolio.
A number of other carriers have cut their exposure to cat business specifically in recent months, including Scor and Everest Re.
This publication revealed in late March that TMK launched a strategic review of its reinsurance business, at which point reinsurance head Will Curran stood down from this role.
TMK’s memo to staff today said its review of the reinsurance business was prompted by “persistent performance issues and increasingly challenging market conditions”.
In a statement to Insurance Insider, TMK said: “Following a recent and widely-reported strategic review, TMK confirms that it will cease underwriting treaty reinsurance business with effect from 1 September.
“TMK’s treaty reinsurance teams are based in London and Singapore but the decision has no impact on any other TMK lines of business, including reinsurance written through other underwriting teams, which are unaffected.”
The treaty team includes London underwriters Jeremy Walker, Lloyd Holmes, Paul Evans and Thomas Smart, as well as Singapore underwriters Boon Chuan Tay and Sok Cheng Moi, according to its website.
It is understood that TMK is committed to its operations in Asia and is still investing in developing its presence in the region.
The move also comes after a reduction across Tokio Marine Holdings in reinsurance exposure.
The group sold its reinsurance platform Tokio Millennium Re to RenaissanceRe for $1.5bn in 2018.
Kiln, which Tokio Marine bought in 2008, was historically a leader in reinsurance in the market, but it has scaled back this position significantly in the intervening years.