AM Best points to Bermuda re/insurance market weakness
Pressure facing the global reinsurance sector may be magnified in Bermuda, rating agency AM Best suggested.
The Bermuda market continues to try to adapt to the persistent challenging underwriting and investment environments. However, despite these best efforts, negative trends have become increasingly evident, AM Best said in March 29 market review.
The global re/insurance sector is facing a soft market due to excess supply and a historically low interest rate environment is pressuring returns.
Return on equity in the Bermuda market fell to 7.0 percent in 2016 compared to 10.4 percent in 2012. At the same time, net premium written in property/casualty grew to $44.1 billion from $36.5 billion over the period.
In the years following the impact of Superstorm Sandy, the Bermuda market experienced a steady deterioration in both return on equity and the combined ratio, AM Best said.
Return on revenue has seen a similar trend, showing that the Bermuda market is struggling to generate profits sufficient to cover the cost of capital, according to the rating agency. The long predicted – yet little seen – drying up of favourable reserve development has slowly started to emerge in year-end 2016 results with favourable reserve development as a percentage of net premiums earned dropping below 6.0 percent for the first time in the current five-year period and steadily declining since the five-year high of 7.3 percent in 2013, AM Best noted.
Bermudians have pivoted to primary and other classes of business, including mortgage re/insurance, and have utilized third-party capital among other strategies to help boost returns, the market report said. Balance sheets have also seen alternative investment allocations, to varying degrees, as well as the increased use of retrocessional coverage to both generate and safeguard capital, respectively.
Nevertheless, balance sheets remain strong on an absolute and risk-adjusted basis. Generally speaking, most Bermudian companies have reduced their overall exposures year over year with an uptick in retrocession through excess-of-loss coverage or de-risking of their books of business. Both actions are yet another indication of the prevailing pricing environment, AM Best noted.
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