Reinsurers warned of need to build reserve buffer for longer-tail classes

Senior industry executives at this year’s Rendez-Vous have voiced concerns over potential reserve deficiencies for specialty and longer-tail classes amid continued social inflation.

The issue was highlighted in a joint interview for The Insurer TV with Guy Carpenter’s chairman of global capital solutions, international Vicky Carter and Arch Re chairman and CEO Maamoun Rajeh.

Rajeh warned that adverse development on long-tail lines was not yet being reflected in earnings, with this dynamic set to play out over the next year or so.

“We are in a place of heightened uncertainty and volatility, and I'm not sure that we've built enough of a buffer in the ecosystem to handle it,” he said.

“The thing people need to keep in mind is that just to stay stable, you've got to bake in a trend that's moving up.

“We're seeing default rates go up, which directly impacts some of the specialty lines, and they are also indirectly impacted by – potentially at some point in time – another hit to assets. That goes back to the buffer point … It's potentially impacting specialty lines.”

State of flux

Amid these concerns, Guy Carpenter’s Carter said efforts by some firms to manage their portfolios to address these risks could prove to be a major differentiator over the coming years.

“The big concern we have as an industry is that while we're in a fascinating market now – it's exciting, this huge opportunity – at some stage, and it could be two or three years’ time, the market is going to come off.

“Then it's going to be about how companies manage the cycle when rates start to deteriorate again.”

Carter said the market remains in a “state of flux”, with some longer-tail classes still facing downward rating pressure.

“You’ve got certain classes of business where people would say we're in a very hard market,” she explained. “You've got other areas of business – such as D&O and other professional lines – where markets, cyber in particular, are challenging. Potentially, rates are going down on certain casualty lines.”

Carter said the challenge for (re)insurers was how they go about continually re-underwriting and optimising their portfolios against the backdrop of heightened uncertainty and volatility.

“It’s probably the most interesting market I have ever been in in my 43-year career,” she said.

“There will be a great opportunity, where people can make a genuine return on capital and equity. That could potentially open up new capital to come into the market, after some very, very challenging years.”

Key points:

  • The reinsurance industry has not built a reserve buffer to compensate for the heightened uncertainty and volatility in the marke
  • Segments such as D&O and cyber do not fit into the trend for hard markets, which characterise other classes of busines
  • The heightened risk environment has made early price discovery even more important