Dedicated reinsurance capacity likely to remain flat: A.M. Best

Ratings firm A.M. Best Company said on Monday that it expects that dedicated reinsurance capacity, which includes US$68 billion of convergence capacity, will likely remain flat at an estimated US$400 billion in 2015 compared with the previous year.

A.M. Best, working in conjunction with Guy Carpenter, has estimated the amount of capital dedicated to writing reinsurance by using its proprietary capital model, Best’s Capital Adequacy Ratio, and reviewing line-of-business allocations for the majority of the top 50 reinsurance organizations, while giving consideration to reinsurance capacity offered by smaller participants in the market. A.M. Best also considered the amount of financed capital (debt) employed in a company’s capital structure, the firm said in a press release. [click image below to enlarge]

The Best’s Briefing, titled, Abundant Capacity Fuels Evolution in Global Reinsurance, states that the “global reinsurance market remains challenging, but A.M. Best’s global reinsurance composite is still expected to post reasonable results for 2015, aided by the lack of large U.S. catastrophe losses, continued capital management strategies and favourable reserve releases, the latter of which A.M. Best sees as unsustainable over the long term.” Conditions will remain competitive and challenging, the briefing said, as primary companies are expected to continue retaining more business and/or seek better terms and conditions for sharing their profitable business.

Convergence capital, which includes industry loss warranties, collateralized reinsurance and catastrophe bonds, continues to enter the reinsurance market, albeit at a slowing pace, A.M. Best said. Catastrophe bond issuances continued to grow strongly to US$8.8 billion through year-end 2014 and tapered off to US$7.6 billion in 2015.

Likewise, capital continued to flow into some collateralized reinsurance vehicles and sidecars. However, traditional rated balance sheet capacity is estimated to decline marginally for 2015, the briefing said, adding that this marginal decline is seen as a “strategic move as reinsurance organizations appear to be reducing their appetite for underpriced reinsurance business in favour of other more attractive business opportunities.”

In addition, recent mergers and acquisitions (M&A) are reflecting the need to attain greater global scale and diversified product lines and distribution. “Reinsurers understand that the ability to move in and out of certain classes of business swiftly through market cycles will lead to a stronger advantage over the competition,” the briefing said. “With current market conditions of price declines, increasing commissions, lower premiums and increased competition, the need for M&A is becoming clearer, and A.M. Best believes that consolidation will continue, particularly among smaller players in the market as acceptable returns become increasingly harder to achieve.”

Companies with the scale and the global footprint to put money to work or shrink a particular offering will have the real advantage going forward, the briefing suggested. “A.M. Best anticipates companies with well-diversified businesses and a global reach will likely see the majority of the deals in the market.”