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AM Best presented its latest report on the industry, Global reinsurance Fighting the Last War.
9 September 2019 Insurance

AM Best reports on Brexit and warns on intense competition and overcapacity in global reinsurance industry

Intense competition and overcapacity are among the biggest challenges for the global reinsurance industry. That was one of the key points in a presentation in Monte Carlo, given by rating agency AM Best, at which it also warned of some of the negative effects of Brexit.

AM Best presented its latest report on the industry, Global reinsurance: Fighting the Last War.

“What is clear is that property catastrophe pricing is still being driven by the availability of third party capital,” said AM Best in the report.

However, it added, traditional capacity has become more closely aligned with third party capital and this should align return objectives for the market overall.

The report pointed to weak global reinsurance market performance, return on equity was just 1 percent in 2018, and worse in 2017, at -0.3 percent. This compared with returns of 11.6 percent, 9.5 percent, and 8.3 percent for 2014, 2015, and 2016, respectively. However, there was an upside to this.

“A decline in earnings and capital volatility have ultimately lowered the return requirements of investors from traditional reinsurance companies,” said AM Best. “The decline in volatility has favourably affected the average cost of capital for reinsurers.”

The presentation also addressed Brexit. AM Best said that regardless of when the UK leaves the EU, AM Best-rated UK-domiciled insurers are generally well prepared. However, it added, all insurers would be affected by Brexit.

“While the effects are difficult to predict with any degree of certainty, they are likely to be negative, at least in the short term.”

With Brexit in view, AM Best said, an office it opened in Amsterdam was now fully staffed and operational. It said EU27 clients were being migrated from London via a contractual novation process.

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