Rate increases in reinsurance market must be long-term to maintain stable outlook: A.M. Best

A string of catastrophic activity in 2010 and 2011 Q1 has chipped away at the reinsurance industry’s capital cushion, says A.M. Best, further cautioning that if the industry continues to underwrite at a loss and investment opportunities remain lacklustre, the financial rating agency would consider changing the sector’s rating from stable to negative.
In its report, Reinsurer Capacity Grew in 2010 Despite Cat Losses, Capital Maneuvers, A.M. Best notes earthquakes in the Pacific Rim early in 2011 have overshadowed the estimated $37 billion of catastrophe losses in 2010. The ratings agency observed modest property catastrophe price increases as a result, but predicted the effects on pricing may be short lived, since the losses only dented – as opposed to depleted – insurers’ capital.
“A confluence of factors has been shifting the mood of industry participants,” the report says. “Deteriorating accident-year performance, diminished levels of favourable reserve development, stubbornly low investment yields and the threat of an interest rate spike have been applying pressure for a change.
“The seismic upheavals in the Pacific Rim have been shifting the ground under insurers’ feet — and the wind has not even started to blow in the Atlantic basin.”
To date, the earthquake losses in 2011 have been manageable from a capital perspective, but they are adding up, the report warned.
A.M. Best says it is concerned a short-lived pricing boost in property catastrophe lines of business will perpetuate the soft market, resulting in a considerably smaller capital cushion entering 2012.
“This seems distinctly possible, barring significant catastrophes for the remainder of 2011 and/or a paradigm shift in the Japanese insurance market,” it continues. “If the worst-case scenario unfolds, A.M. Best will consider revising the ratings outlook to negative, as pressure on ratings would be expected to increase.”