12 September 2017Insurance

AM Best maintains negative outlook

According to AM Best, the global reinsurance market in 2017 is wrestling with the French saying ‘plus ça change, plus c’est la même chose’—usually translated as ‘the more things change, the more they stay the same’.

Speaking at the AM Best market briefing at the Monte Carlo Rendez-Vous, Greg Carter, managing director of analytics, said that the industry in 2017 was dealing with the same issues he identified at the 2016 event.

These include the fact that US debt remains very high, interest rates are low, housing bubbles have formed in many areas—with subprime reappearing in the US, albeit on a small scale, terrorism appears to be rampant, there is much uncertainty over Brexit and the stock markets remain at all-time highs.

Looking at current global market trends in 2017, Greg Reisner, director of property/casualty, said that some companies are better diversified than others, so they will be able to withstand losses from natural catastrophes more easily. He added that re/insurance as a whole industry is well capitalised.

However, AM Best pointed out that the 2016 composite combined ratio was now 101 percent—the highest in five years. The rating agency stated that due to the recent natural catastrophes (potentially including Hurricane Irma) the 2017 figure will be higher than that.

Looking at the top 10 largest reinsurance groups Robert DeRose, vice president, reinsurance, noted that this year Munich Re has lost its number one position to Swiss Re, as the latter had benefited from a quota share deal with AIG. Looking at the list he added that PartnerRe has been expanding into life business. The top 10 companies now control 68.6 percent of life & non-life reinsurance gross premiums written.

However, DeRose stressed, there are some potentially tough times ahead for the industry.

“Risk-adjusted returns are strained as pressure continues bearing down on underwriting margins and investment yields offer little help,” he said.

“The market headwinds at this point present significant longer-term challenges that industry players need to work through.

“AM Best has said that companies that are not proactive will not lead their own destiny. M&A will continue to be a part of the landscape over the next few years but M&A is not a cure and also has its own potential dangers.”

Carter noted that in terms of Brexit, there remains great uncertainty but business is carrying on as normal. The London Market has been worrying over losing its status as a reinsurance hub, but so far no single centre in Europe has emerged as a rival. In addition, he pointed out, London has a huge reinsurance infrastructure and this would take time to dismantle.

AM Best noted that it was too soon to gauge the impact of Hurricane Irma but Reisner was able to comment on Hurricane Harvey.

“AM Best does not expect a significant number of rating actions for AM Best-rated entities to be associated with Hurricane Harvey. However, rated entities with significant market share in the region impacted will be evaluated relative to AM Best’s previous loss expectations and any material deviations could potentially lead to negative rating action in the form of under-reviews, outlook revisions or downgrades,” Reisner said.

AM Best is also taking the view that the global market will continue to become more efficient as all players strive to become closer to the client. Expenses are being squeezed and brokers are under long-term stress.

As a result, the rating agency said, the role of brokers or even their size might change over the long term. DeRose pointed out that many of the usual lines are blurring as everyone tries to get closer to the client, and that as a consequence strategies are evolving to cope with this.

AM Best identified a number of potential opportunities for the market, which include cyber insurance, flood, mortgage, terrorism and insurtech.

The AM Best briefing concluded with the statement that capitalisation remains strong for the market, but that performance has been deteriorating and pressures on margins continue to mount. As a result, returns for some reinsurance companies will fall short on a risk-adjusted basis.

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Today’s Monte Carlo stories

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A new ILS hub to ponder

Protectionism and more excess capital

Swiss Re sees growing collaboration opportunities with insurers

Reinsurers and ILS to benefit from post-Irma demand

Time to shine after the storms have passed

Innovation a top concern of brokers

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