A.M. Best Report: ‘Catastrophe Exposure Grows’

April 20, 2016

Insurers in the London, Europe and Bermuda markets writing catastrophe-exposed business take a different approach to retention of risk at the 1-in-100 year level compared with the 1-in-250 year level.

At the lower return period, retention has increased more steeply when pricing is favourable. In contrast, the sensitivity to price of retained 1-in-250 year risk appears minimal, and has reflected capital allocation decisions, including the management of Solvency II capital requirements.

This is one of the conclusions that A.M. Best has drawn from a sample of aggregated probable maximum loss [PML] data over the 2012-2015 period from 25 of the largest A.M. Best-rated companies writing catastrophe-exposed business in these markets, and which it has published in a new Best’s Special Report, “Catastrophe Exposure Grows; Alternative Capital Used Selectively.”

The report notes that the sample’s gross PML growth fell short of estimates of the increase in industry-wide exposure between 2012 and 2015 at both levels, most likely due to the expansion of alternative capital insurance vehicles, together with reinsurance programme consolidation and variations in the propensity of other cedents to reinsure into the insurers that comprise A.M. Best’s sample.

Consideration of exposure to catastrophes is a key component of A.M. Best’s rating methodology and is monitored closely on a company and industry basis.

Anthony Silverman, senior financial analyst, said: “A.M. Best has calculated indices of PMLs, both net and gross of insurance, for 1-in-100 and 1-in-250 year risk for the sample insurers in order to identify cumulative changes over the period of the data.

“The indices indicate the sample was retaining considerably more catastrophe risk by the end of the period than it was in 2012, but that the increase in retained risk, whether driven by price or consolidation of reinsurance programmes, has been more a feature of 1-in-100 year risk than of 1-in-250 year risk. Growth in retained 1-in-100 year risk broadly matched the increase in industrywide exposure over the period of the data.”

The influence of alternative capital and the development of “insurance as an asset class” for the wider capital markets has primarily been a story about catastrophe reinsurance and retrocession.

“Wider capital market participation in insurance often is discussed in terms associated with technology products, leading to expectations of disruption, transformation and very rapid timescales for change,” Silverman added. “However, there are reasons to expect the influence of alternative capital will have its own limits.”

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