February 16, 2006 by Canadian Underwriter
A.M. Best Co. has extended its negative outlook for the US and Bermuda reinsurance markets to 2006 as the ratings agency says it anticipates there will be few, if any, rating upgrades or positive rating outlooks assigned throughout the year.
A.M. Best says even though 2005 saw numerous rating downgrades, only a few reinsurers in these sectors currently hold negative ratings outlooks. The underlying stability of these markets remains tenuous, according to A.M. Best.
The US and Bermuda reinsurance sectors remain susceptible to pricing competition as A.M. Best reports that the investor expectations for double digit returns are high. If the currently perceived market opportunities in property are not significantly realized, the rating agency warns that the companies receiving much of the new capital that recently flowed into these markets might be forced to find alternative strategies.
“The markets have already demonstrated that while property rate increases attained for January 2006 renewals were favorable, they were nonetheless narrowly focused and limited to those covers affected by recent losses,” A.M. Best says. “Casualty business has seen little if any benefit from the hurricane losses in 2005. Should companies seek to diversify the new capital into casualty, it could trigger additional softening for the casualty segment as well.”
Additionally, A.M. Best explains that if another active storm season in 2006 or further reserve development from the 2005 storms materialize than the hard property market may be prolonged, but at an additional cost to earnings and capital.
A.M. Best says that the financial flexibility of some companies is already stretched with debt to capital for the industry at an all time high.
While common equity has previously flowed into the market with relatively little resistance, A.M. Best questions if another year of losses will dampen investors’ appetites for a stake in insurance and reinsurance holdings.
As a result of the hurricane losses in 2005, A.M. Best says it continues to take a more rigorous approach in its due diligence regarding the evaluation of companies’ capitalization and risk management controls.
While catastrophe models will be utilized as valuable tools for the quantification of risk, A.M. Best says they will not be the only barometer.
Management, A.M. Best says, must demonstrate that underwriting and risk controls are adequate to ensure that there is a clear understanding and controlled correlation with un-modeled exposures.
In response to the state of the market and potential catastrophic risks, A.M. Best will now require more detailed information through its supplementary rating questionnaire and in company meetings.