13 January 2015 News

Cycle management shrinks cat portfolios

Continuing pressures in the reinsurance market are forcing companies managing the cycle to continue to reduce their retained exposure to classes of business that do not meet acceptable return hurdles.

This is according to AM Best’s briefing on the global reinsurance sector which added that this has led to significant reductions in reinsurance books of business, particularly for property catastrophe.

“For the most part, 2015 is expected to produce an even more careful approach to risk selection. The orderly approach to risk selection appears to be working for global companies, and most are expected to remain cautious on the business they write as capacity remains high and the market becomes increasingly competitive,” said AM Best.

Pricing in 2014 experienced double-digit declines in certain lines of business, and reinsurance pricing overall is expected to remain under pressure in 2015, given the lack of any price hanging event over the past few years.

During 2014, reinsurance companies have seen property cat price declines of 20 percent in some cases for all renewal seasons.

“The dramatic price declines in 2014 continue to be attributed to the lack of market-changing losses, as well as increased retentions by ceding companies and the persistent inflow of capital from the capital markets, largely in the form of insurance-linked securities (ILS),” added AM Best.

AM Best also noted that although pricing continues to soften, and terms and conditions are becoming more challenging, the US and Bermuda reinsurance sector is still delivering solid returns on equity (ROEs).

For the past five years, the average ROE for the sector is about 10.4 percent, which includes the significant losses of the 2011 events that led to negative results for many.

However, as the industry’s pressures continue, ROEs are expected eventually to settle into single-digit territory for some time, for most if not all companies.

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