AM Best has said its expectation that significant price increases are mostly limited to business lines affected by the US hurricanes, has been confirmed by recent reporting of renewals.
AM Best said it believes that the significant losses from Katrina, Wilma and Rita incurred by reinsurers have only helped to temporarily halt the downward trend in the underwriting cycle prior to these events.
However, it added that price competition is expected to resume if underwriting results in 2006 turn out to be favourable, as capacity for most lines of business remains readily available.
The substantial improvements in premium rates, limited to loss-affected business lines comprised mainly of offshore marine and property catastrophe, are, in AM Best's opinion, insufficient to compensate for the losses incurred by reinsurers in 2005.
As a result of the severity of Hurricane Katrina, but also from the acceptance that such events are likely to occur more frequently, reinsurers are reassessing their internal models and their aggregate exposure. In some instances, this has already led to a reduction in limits by reinsurers.
The ratings agency said it believes that the maintenance of the current financial strength of the European reinsurers will, to a large extent, depend on their ability to generate earnings supportive of their risk-adjusted capitalisation through a period of more frequent and more severe natural catastrophe claims.
AM Best said reinsurers need to adapt both their underwriting strategies and their risk controls to this changing landscape. Also, if underwriting results continue to be extremely volatile, investors may be reluctant to provide additional capital, hence also negatively impacting the financial flexibility of the reinsurance sector.
