Property reinsurers should focus on profits not premiums: analysts

Analysts at RBC Capital Markets have contended that property reinsurers should be focusing on writing less business to maximise profits, despite the attractive rates currently offered by the hard pricing environment.

In a new report, RBC explores why so many reinsurance companies are opting to reduce their exposure to volatile catastrophe risk at a time when this kind of business seems to promise very lucrative returns.

But it concludes that these firms are acting prudently in downsizing their appetites for cat risk, maintain that “it is about profits, not premiums.”

“Writing more business focuses attention solely on the top line – the issue for reinsurers is not just writing more, that is easy. Its managing their exposures in a market that seems to be producing a lot more losses resulting from both increased frequency and severity of natural catastrophe events as well as rising inflation which makes determination of losses that much more difficult,” RBC explains.

“Said differently, anyone can write more premium – good underwriters want to generate more return.”

Looking at which reinsurers have opted to reduce their catastrophe exposures, RBC notes that it is mainly established companies with lots of experience, which would suggest that this move is considered to be the shrewder long-term tactic.

“There are not any freshly minted IPOs that are looking to run-up fancy growth numbers to impress their investors,” analysts pointed out. “This is a more mature and experienced bunch, they will favor playing the long game as long as they can.”

Additionally, the report observes that large underwriters are now much more diversified than they were in the past, which means that traditionally catastrophe-focused businesses such as Arch, RenRe, Everest and Axis can all allocate capital to insurance or reinsurance businesses as well as among different reinsurance specialties in a way that they could not have done previously.

“Diversified companies do not need to go ‘all in’ on writing property cat, they have choices and indeed their shareholders reward them for making those allocations,” RBC stated.

Also worth considering, this trend towards withdrawal from catastrophe risk is not leaving carriers without any available capacity, as capacity remains plentiful despite sizeable losses over the last several years.

AM Best estimates that global reinsurance capacity was approximately $532 million at the end of 2021, up 3% from 2020 and up 10% from the end of 2019.

And while certainly some of this surplus will have been reduced in early 2022 as a result of falling bond and equity markets, it’s still more than 40% higher than where industry capacity was at the end of 2013 when reinsurance pricing last peaked.

“Industry incumbents are smart enough and experienced enough to know that after patiently waiting out a 5-6 year soft market, they would be wise to move slowly in adding capacity less the cook the goose before it has a chance to lay any golden eggs,” RBC concluded.