Growth for global reinsurance continues, but economic challenges remain: A.M. Best

The global reinsurance market is continuing to grow, despite several economic environment challenges, rating company A.M. Best says, adding that it is holding the outlook for the segment at stable.

In a new special report on the reinsurance market, the firm notes that a return to underwriting profit for the market last year las allowed it to continue its growth.

Based on its composite analysis of global reinsurers, the company reports a combined ratio of 92.0 for the calendar year, improved over the 107.4 reported in 2011.

The reinsurance segment will also “comfortably absorb about 40%” of the current industry loss estimate of $25 billion from Superstorm Sandy, Best says. The Lloyd’s market also improved for 2012, with a combined ratio of 91.1, compared with 108.1 the prior year, the rating firm notes.

However, deteriorating  investment yields and the persistent low interest rate environment present an ongoing challenge, the company says. “Near-term improvement on that front appears unlikely, unless companies choose to stretch for yield, taking greater risk on the asset side,” Best says.

“Reinsurers have harvested some capital gains over the period and have increased holdings of cash and short-term investments to maintain flexibility to reinvest easily at higher yields once more favorable interest rates return,” the firm also notes.

“How long that wait will be remains the question. Meanwhile, management teams have to plan and prepare for inflationary and deflationary environments,” it adds.

Weak yields have also “increased pressure on underwriters to find better margin business while staying within their stated underwriting risk tolerances,” Best notes.

“This is difficult, considering the current view that the reinsurance and broader property/casualty markets are overcapitalized,” it adds. “The industry as a whole has recognized that achieving a 15% or even a low double-digit return on equity, is challenging when the risk-free rate is in the low single digits.”

Reinsurers are overall well-capitalized and capable of absorbing losses from events, and assuming a stabilization of the global economy and a normal level of catastrophes losses, Best says it expects “reasonable organic growth in reinsurers’ capital for 2013, tempered by active capital management strategies.”

The full special report on reinsurance from A.M. Best is available on its website.