Reinsurance market appears to be stabilising despite ongoing pressures

While rates continue to remain low and the sector overcapitalised, the conditions of the global reinsurance market appear to be stabilising, according to AM Best.

The ratings agency said that reinsurers will post 'reasonable' results for 2016, aided by the lack of large US cat losses, ongoing capital management strategies, and continued overall favorable reserve releases.

Despite an uptick in cession rates, driven by relatively stable terms and conditions available in the market, the market remain competitive.

"Some observers believe that we may be nearing the bottom of the soft market as brokers are experiencing greater difficulty filling out under-priced programs and demands for further concessions in terms diminish," said AM Best.

"Nonetheless, current accident year underwriting margins will remain pressured for the near term, as rates remain at historical lows."

The overcapitalisation of the market continues, and AM Best estimated there was $420 billion in total dedicated reinsurance capacity in 2016, compared to $400 billion in both 2014 and 2015.

The speed of third-party capital entering the market appears to be slowing in comparison to year prior, and some collateralised market have held capacity flat, unable to find suitable opportunities, which the rating agency suggested is a healthy response to the current market environment.

Convergence capital, collateralised reinsurance and cat bonds also continue to enter the market, albeit at a slower pace.

Cat bond issuance in particular has continued to grow favourably through year-end 2014, but has tapered off in the last two years.

Similarly, capital has continued to flow into some collateralised reinsurance vehicles and sidecars.

AM Best expects this marginal growth trend for rated balance sheet capacity to continue in 2017.

The ratings agency attributes this increase to earning outpacing share buybacks and dividends, excluding any extraordinary cat losses, which it sees as a strategic move by reinsurers to better position themselves for future opportunities.