Global reinsurers continue to feel the heat: A.M. Best

Reinsurers worldwide continue to experience negative pressure on their financial strength as hard market rate increases fail to bolster capital or shareholder interest, says rating agency A.M. Best.
In its “Global Reinsurance” report, the firm notes that reduced capital following September 11 losses, adverse development on liability and continuing investment return woes is among the factors creating downward pressure on reinsurer ratings.
Also, institutional shareholders continue to shy away from the industry as a result of weak returns and fear of future adverse development. The study notes that despite improved underwriting results by many reinsurers, A.M. Best “doubts that this will be sufficient to support high levels of risk-adjusted capital adequacy over the cycle”.
The result of these challenges has been increasing unwillingness of major financial services and banking companies to support their reinsurance arms, and other reinsurers pulling out of specific lines or territories to reduce exposure.
Nonetheless, A.M. Best expects strong pricing to continue. “While property pricing may be beginning to soften, this is typically from rates well above the technical level,” a press release notes. “Casualty, meanwhile, continues to firm in many lines, although absolute quality of current pricing remains uncertain given the ongoing potential for adverse development from the 2002 and 2003 accident years.”
The rating agency looks favorably on new players who are not exposed to long-tail claims and who have shown disciplined pricing and conservative capital strategies.
Going forward, the main issue will be whether reinsurers are willing to sustain price discipline, or fall victim to price competition within regional markets or from large players putting price pressure on smaller reinsurers. “Equally, if the start-ups use their clean balance sheets to enter new lines via pricing, especially casualty, the move back to irrational prices could all too easily be triggered.”