ICMIF Supporting Member AM Best has published an analysis of the impact the current Middle East conflict is having on reinsurers’ resilience.
According to AM Best’s analysis, losses to the global reinsurance market are currently limited and would generally be characterised as single large losses. However, if the conflict continues, there is scope for accumulations across countries and products.
As reinsurers continue to monitor the situation closely and adapt to the changing landscape, AM Best advises that stress testing and scenario analysis are fundamental to their risk-management approach. This includes the use of reverse stress testing, which involves considering extreme tail scenarios, such as geopolitical conflict.
“While modelling such risks is complex, reinsurers have shown that their balance sheets can absorb severe events and that they have contingency plans in place if capital needs to be raised,” says AM Best.
“The conflict re-emphasises the importance of stress testing in general and bespoke stress testing in particular. Anticipating volatility and scenarios such as these, as insurers plan capital and risk-management options, is critical to an insurer’s resilience and is considered within AM Best’s ratings process,” it adds.
The most direct and immediate impact has been experienced in marine, aviation, trade credit, (contingent) business interruption and political risk insurance.
According to AM Best, the insurance impact on both domestic and international (re)insurers is currently manageable. The scale of losses at this stage is not material, and net losses should be adequately absorbed. One-off large losses are also absorbable by the reinsurance sector.
However, AM Best cautions that, over the longer term and at renewals, reinsurers may adjust pricing, terms and conditions, and commission rates in regional markets. The rating agency expects demand to rise for covers such as property, infrastructure and business interruption, but warns that supply at appropriate pricing levels will also need to be available.
