“We must maintain underwriting discipline.” This phrase is arguably the most repeated mantra in the reinsurance industry over the past two years, and you will struggle to find anyone in the market who would disagree with that idea.
The reality, however, is that despite best intentions, reinsurance carriers often end up back in the same place they were in the last cycle.
For many years, reinsurance pricing was inadequate, terms and conditions were not tight enough, and reinsurers struggled to meet the cost of capital. Despite such soft market conditions, many reinsurers continued to grow their business, even while acknowledging that pricing had deteriorated significantly.
Read more: Reinsurers Have Made Major Structural Changes to Improve Profits. Will Discipline Last?
In 2023, the market saw a much-needed correction when global prices were more aligned with the underlying risk. AM Best reported that in 2023, global reinsurers had one of their best years in recent history, with a number of major reinsurers reporting combined ratios of below 90.0 and returns on equity exceeding 20%.
In June 2024, AM Best changed its outlook for the reinsurance industry from neutral to positive, and held their view later in the year, expecting to see robust underwriting profit margins despite second-half losses from Hurricanes Milton and Helene. Demand for coverage remained strong and was growing due to heightened natural catastrophe loss activity and economic and political uncertainty.
But as retained earnings grow and investors’ capital returns to the market, we can anticipate that the temptation to grow will ultimately be too strong, as witnessed in previous cycles.
Navigating the Changes
At its most basic, all reinsurance businesses must balance top line growth with profitability. But how can we make sure we are making the right decisions as market dynamics shift?
First, we must understand why the cycle occurs. Talk of managing the cycle has existed for multiple decades, driven by either an abundance or a shortage of capital in the industry, which itself is driven by favorable or unfavorable financial results. The lag between underwriting years and financial years masks the impact of the cycle, enabling reserve releases to bolster results as returns start to drop off.
Understanding why it occurs is only part of the solution; anticipating the cycle’s low point is equally important. Having tools in place to monitor pricing trends and changes in terms and conditions can help predict upcoming shifts.
The people who have the clearest insight into the market at any given time are, of course, underwriters. They are the ones who hold day-to-day conversations with their clients. Underwriters understand the economic challenges cedents face and the insurance protection they need to navigate often-volatile market conditions.