December 13, 2016 by Canadian Underwriter
A.M. Best Company is holding its outlook for the global reinsurance sector at negative, citing the continued market challenges that will hinder the potential for positive rating actions over time and may eventually translate into negative rating pressures.
The Best’s Briefing titled Global Reinsurance Outlook Maintained at Negative and released on Monday said that the strain on profitability is evident in reduced risk-adjusted returns with market headwinds at this point, presenting significant longer-term challenges.
“Recent indications of a market bottoming are slowly emerging, but the overall operating environment remains negative, which is concerning,” said Robert DeRose, senior director at A.M. Best, in a press release.
Negative factors such as low rates, broader terms and conditions, the unsustainable flow of net favourable loss development and anemic investment yields will continue to adversely impact risk-adjusted returns over the longer term, the release said. Alternative capital also looms as an additional pressure-bearing front and now comprises approximately 20% of the dedicated global reinsurance market capacity. “This percentage has been steadily growing year over year, underscoring why cycle management has been a key strategy for organizations possessing the capability to move between primary and reinsurance platforms.”
While rated balance sheets are currently well-capitalized and capable of withstanding various stress scenarios, the release noted, this strength may erode over time for some carriers as earnings come under increased pressure, favourable reserve development wanes, earnings grow more volatile and the ability to earn back losses following events is prolonged by the instantaneous inflow of alternative capacity.
“These issues have placed unrelenting pressure on underwriting discipline, forcing insurers to exercise restraint or risk long-term viability,” DeRose added.
In A.M. Best’s view, companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better-positioned to withstand the pressures in this difficult operating environment and have greater ability to target profitable opportunities as they arise.
The briefing said that while broader cyber and flood (re)insurance solutions in the market, in addition to regulatory changes in the European Union and China, may over time provide some new business opportunities for reinsurers, it is too early to gauge any potential benefits. “The full consequences of ‘Brexit’ and a Trump presidency are also difficult to measure at this point,” the briefing said.