Report: Insurers Suspending Exposure To Specific Risks

…as reinsurers adopt new strategies


As catastrophes keep emerging in different dimensions globally, underwriters are also adopting measures to remain in business as well as cut cost and sustain profitability.

To remain afloat in this regard, insurers across the world are taking measures as report emerges that those operating in the United States have resorted to suspending exposure to certain risks.

A report by Atlas Magazine specifically said several US insurers were suspending the underwriting of certain coverages in order to reduce their exposure to specific risks.

The report said: “This is the case of State Farm and Allstate, which ceased underwriting new homeowner’s insurance policies in California. AIG and Farmers Group, which reduced their exposure to weather risks in Florida, a region frequently hit by floods, storms and forest fires. American Automobile Association (AAA), which is suspending the renewal of motor and home policies for certain customers in Florida.”

Giving reasons for the decision, the report said it was due to “the resurgence of high-intensity natural events,high property exposure to catastrophic risks,soaring repair and construction costs, tighter reinsurance market conditions.”

The report also said characterised to be less important than climatic events or cyber-attacks, conflicts, riots, popular movements and other forms of unrest are not negligible risks.

“The growing political instability affecting many countries is an aggravating factor for riots and civil unrest, which are becoming increasingly widespread.

“These risks, previously included in fire and property damage coverage, are no longer regarded as isolated events. They are increasingly associated with political risks and, unless specifically agreed, are often excluded from standard insurance policies.

“The generalisation of these risks represents a major global trend that requires special attention from insurers,” the report said.

Also projecting on the global reinsurance market, especially with regard to special renewal in 2024, the report said, in a context of high volatility, the 2022 reinsurance market had shown a mixed picture.

According to the report, after several years of underperformance, reinsurers have adopted a more cautious technical approach over the past two years, imposing underwriting discipline over long cycles, while redeploying available capital. It’s a strategy that has resulted in higher profitability in 2021 and 2022.

On the challenges faced by the reinsurance market in 2023, the report said with rising claims, higher inflation and persistently low interest rates, reinsurers have been operating in an unfavorable environment for several years.

“They are also faced with new, more complex and poorly modeled risks: pandemics, cyber risks, climatic events, financial, inflationary and political risks.

“In this challenging environment, reinsurance companies have no choice but to adapt. They have to strike the right balance between limited capacity and strong demand from their customers,” the report said.

On the decline in reinsurance capacity, it said: “In 2022, for the first time in 10 years, the reinsurance market was faced with a decline in the volume of capital invested, which has dropped from $571 billion in 2021 to $530 billion in 2022, a decline of seven per cent.

“This decrease comes at a time when major rate adjustments have been implemented over the past two years, with increases of 30 per cent to 40 per cent on certain risk categories.

“The increase in rates has not, however, led to the injection of additional capital into the market as the main players have simply resorted to reducing their exposure to certain risks and geographical areas.

“More cautious underwriting strategies were then put in place for the 2022 and 2023 renewals, with the main aim of limiting catastrophic commitments. This pricing catch-up was also coupled with a tightening of contract renewal conditions.”

Specifically, the report observed that AXA’s subsidiary, AXA XL, for example, reported a 6.3 per cent rate increase for the first half of 2023, while Swiss Re raised property-casualty prices by 21 per cent at the July renewals this year.

According to the report, “in 2022, this pressure on available capital was mainly due to catastrophic events that have dried up market capacity, the average annual increase in natural catastrophe claims.

“Insured losses now exceed $120 billion per year, rising property values and inflation,strong demand for coverage from insurers,the volatility and poor performance of reinsurers in recent years,risk reduction in certain portfolios, investment losses linked to capital appreciation in traditional reinsurance,increased stock market volatility.”

It also quoted industry professionals as saying that excess reinsurance capacity had lasted for several years, stressing that “in fact, the decline in capacity offered in 2022 has not compromised the market, which still has the necessary funds to meet its commitments.

“Another factor in the recovery is that reinsurers have become more disciplined, remaining cautious as to their way of deploying their capacity.”

The report further pointed out that for 2023, AM Best was forecasting that losses incurred prior to 2022 would be recouped, resulting in an increase in operating results and the generation of new capital.

“It is, therefore, up to insurers to position themselves better and absorb frequent losses, so that reinsurers can refocus on their primary role of supporting primary players in the face of major catastrophes.

“All in all, the rating agency is predicting a 5.6 per cent increase in reinsurance supply in 2023.”

The report also recalled that in terms of economic losses, 2022 stood for the fifth most expensive year in the last two decades.

“In addition to that, and with $125 billion in insured losses, 2022 is found to be the fourth most impacted year, after 2017 (Hurricanes Harvey, Irma and Maria), 2011 (Japan Earthquake) and 2005 (Hurricane Katrina).

“The most significant events that occurred in 2022 were hurricane Ian, which lashed Florida in September. It was the most costly event of the year, with insured losses estimated at between $50 billion and $65 billion, storm Eunice, which hit north-western Europe, winter storms in the United States, the Fukushima earthquake in Japan, the deadly floods in Australia, the equally deadly floods in South Africa in April and May, record drought in Europe, China and the Americas, the mega forest fires that ravaged Canada and several Mediterranean countries between May and September,” the report said.

It further observed that over the past 20 years, insured losses had risen by an annual average of 8,47 per cent, an increase due not only to climate change, but also to higher risk exposure, higher insured property values and inflation.

“After peaking at $154 billion in 2017, insured damage losses have risen significantly again in the last two years, to $111 billion and $125 billion in 2021 and 2022 respectively. The $100 billion threshold for insured losses should be reached and exceeded in 2023.

“As natural catastrophes have continued to gather momentum, a large number of insurers and reinsurers have resorted to readjusting their underwriting policies for 2023.

“This is particularly the case in the US and Australian markets, with some players in these markets having decided to drastically reduce their capacity, while others preferred to stop underwriting natural catastrophes,” the report said.

Referencing high exposure to primary and secondary hazards, the report said that in recent years, the reinsurance market had been heavily affected by the high intensity of large-scale primary hazards, such as hurricanes and earthquakes. Secondary perils, meaning those of medium intensity, are also feared by the industry due to their high frequency. Losses such as hail, floods and forest fires account for an ever-increasing share of the damage covered by insurers.

In the long term, such primary and secondary catastrophes dry up or severely restrict capacity.

“Faced with this situation, reinsurers have no choice but to impose higher retentions, tighten contractual conditions,exclude certain hazards.

“Against the backdrop of climate change, the issue pertaining to the insurability of such risks is more important than ever

“Faced with rising risk capital and soaring costs of repairing and rebuilding damaged property, reinsurers are concerned about inflation as they are required to reassess their risk exposure,anticipate the impact of inflation on their reserves,increase rates in line with inflation to avoid losses and cash flow difficulties.US insurers withdraw from certain risks,” the report added.




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