September 11, 2013 by Canadian Underwriter
Underwriting discipline is keeping the outlook for the reinsurance market stable, in the face of downward pressure on pricing and continuing low interest rate challenges, according to a ratings agency analyst.
Overall, the reinsurance market in Canada is well-capitalized, Scott Mangan, a financial analyst for Caribbean and reinsurance ratings with A.M. Best, noted during the firm’s Insurance Market Briefing – Canada event in Toronto Wednesday.
On a five-year basis, the reinsurance market has had an average combined ratio of 95.4%, according to Mangan. Overall, the Canadian market also marginally outperforms the global reinsurance market, he noted.
A “mega-cat” event (a $100 billion or more loss) is a risk, although most reinsurers here remain well-positioned to take on a catastrophe like that, Mangan said.
Low interest rates, however, have been a challenge for the reinsurance market globally, Mangan said.
That’s been one driver of capital markets entering the reinsurance sector, as there are few other viable investment alternatives, Mangan said. Catastrophe bonds and sidecars are the main vehicles being used, he noted.
“A few hedge funds have chosen to enter the reinsurance market directly by forming new reinsurance companies, which has certainly drawn attention,” A.M. Best also noted in a recent report on the global reinsurance sector.
In addition to continued low interest rates, a spike in interest rates does present a risk for the industry, Mangan said. “We believe that reinsurers are well-positioned to handle that if that were to occur,” he noted.
Continued downward pressure on pricing could also squeeze underwriting margins, and remains a risk going forward, he added. “Underwriting discipline has been a very important factor in maintaining that as you see capacity increasing, pricing is…being pressured,” he said.
Going into Jan. 1 renewals, Mangan said that there could be potentially more focus on terms and conditions than on pricing.
Overall, A.M. Best’s ratings outlook for the reinsurance sector is stable, meaning that most of its rating actions will be affirmations.
“It’s underwriting discipline that is the anchor for the reinsurance market, and if that were to slide, certainly we could see some changes on that regard,” Mangan added.