AM Best sees negative outlook ahead
Rating agency AM Best has claimed that the global reinsurers can expect some tough times ahead, as they face a wide range of negative factors.
At the rating agency’s annual presentation at the Monte Carlo Rendez-Vous, AM Best said that its negative reinsurance rating outlook was due to increased client retentions, excess capacity, capital convergence, questionable underwriting discipline, low investment returns and declining reserve redundancies.
AM Best also highlighted a number of key macro-economic factors that, it said, will affect the overall re/insurance market.
Speaking at the presentation Stefan Holzberger, chief rating officer, said that although global economies had recovered from the impact of the 2008 financial crisis, some areas, such as developing economies, had seen a bit of a rocky road ahead of them due to dips in growth levels.
Holzberger added that although interest rates are at historic lows in many places, this might change. “We’ll have to see at what point and when policymakers will decide to bring those rates back up,” he told delegates.
“As long as they remain as low as they are it’s really bad news for the insurance community, where investment income levels are trending down. Even with an uptick in interest rates there will be a lag, based on the duration of these bonds in investment portfolios, before interest rates come back up and we see an impact on re/insurer earnings.”
Holzberger also said that the world’s overall demographics are changing, with interesting possible implications for the insurance industry. Citing figures provided by the United Nations Population Division he pointed out that since 2005 more people live in urban environments than rural environments, and this demographic trend is expected to continue, with China seeing particularly rapid growth in its cities.
AM Best also said that the recent increase in mergers and acquisitions (M&A) activity is set to continue, and that M&A has captured the heart and mind of management in many companies as they seek to obtain diversification and capability, and then scale.
According to John Andre, group vice president at AM Best, most of the recent M&A deals have been focused on one or all of four main categories—broader product capability, broader geographic reach, greater influence with brokers and cedants and greater attractiveness to third party capital.
Finally, AM Best pointed out that alternative capital is driving a great deal of structural change in the market. Although cultural issues are no longer limiting M&A activity, the market is still heavily influenced by global leaders, with this last fact being unlikely to change any time soon.
