As property and casualty insurance prices continue to fall, the bigger concern facing the global industry is how much it should increase financial and actuarial risks.
Risk and reinsurance specialist Guy Carpenter said in a report that global catastrophe reinsurance prices dropped this year to levels below those last seen in 2001.
The Wall Street Journal
observed that significantly low investment returns are taking their toll on insurer profits while inviting investors to become suppliers of alternative capital to underwrite reinsurance risks. Making things more complicated, the lack of costly disasters in the past few years has induced a glut of capital build up, making it cheap.
reported that the drop in prices is slowing, but continues to dwindle. At the same time, the growth of alternative capital through catastrophe bonds and other vehicles similarly continues despite slowing.
While these suggest that reinsurance prices would eventually hit a bottom, insurer demand for reinsurance has slowed down as well—all thanks to dwindling demand for property insurance.
Additional reports from Moody’s
found that reinsurers are writing policies with higher probable maximum losses, particularly those related to hurricanes in the U.S. Storms in America take the largest area of the cat market since many insured properties are typically affected during such severe weather events than for any other regularly expected event.
also noted that largest loss reinsurers expect from a one-in-250-year-size hurricane event in the U.S. is equivalent to 16% of their equity this year on average—up nearly 2 percentage points from last year. This leaves reinsurers more vulnerable to natural catastrophe risks despite the market’s low pricing.
There are worries that ordinary insurers will become more aggressive with reserving policies by setting aside less money to cover for claims, all in an effort to boost profits.
Reinsurers are trying to sell more structured policies to release capital from ordinary insurers’ balance sheets to fund shareholder payouts or other investments—another trend that could have serious implications for the market, WSJ
noted. This could risk putting the industry’s capital safety net in fewer hands and adding leverage to the system. Mounting leverage and higher risk will continue to loom in the background until it explodes in everyone’s faces.
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