Reinsurance market shows resiliency, underwriting remains key

Reinsurance companies would be well-advised to continue to focus on solid underwriting to weather uncertainties and adapt to changes.

Companies “really need to remain focused on their underwriting,” Gale Guerra, a senior financial analyst at A.M. Best Company, told attendees at the company’s 2012 Insurance Market Briefing – Canada, held in Toronto on Sept. 6.

The reinsurance market rebounded nicely from a rough 2011, Guerra said, pointing out that A.M Best did not have any downgrades through 2011.

The solid performance, in light of the numerous catastrophe events that occurred, “really speaks a lot to [companies’ enterprise risk management] programs and the sophistication and adequacy of those programs.”

Despite that performance, Guerra recommended keeping a close eye on a several issues: diminishing prior-year redundancies, diminishing reserves, weak investment returns and yields, and the global financial situation, among these. “There’s so much uncertainty that companies want to be very cautious.”

Many may have hoped 2012 would usher in a hard market. And while there were rate increases at the January and April renewals, Guerra said, these levelled off in June and July.

Overall, if the first half of 2012 is any guide, “everything is looking good for the reinsurance industry as a whole,” Guerra said.

That has not stopped some reinsurance companies from trying different things. “Reinsurers have always been what I would call innovators,” Guerra said. “They’re moving into some other things, aligning themselves by acquiring MGAs, using captives and using co-insurance on larger commercial lines.”

Some companies are also combining reinsurance operations with a hedge fund investment strategy. “They like this because it’s a source of permanent capital, returns are uncorrelated… and there are also tax advantages,” Guerra said.