Global reinsurance outlook upgraded by AM Best
AM Best has revised its market segment outlook for the global reinsurance industry to stable from negative for 2019.
The move was driven by a “growing alignment between traditional and third-party capital among non-life reinsurers,” the agency said.
“A more-stabilized pricing environment—albeit at levels still below long-term adequacy—a rising interest rate environment, emerging growth opportunities and ongoing stability in the global life reinsurance segment also are factors in the outlook revision,” AM Best said.
The new Best’s Market Segment Report, titled, “Market Segment Outlook: Global Reinsurance,” states that reinsurers rated by AM Best remain well-capitalized on a risk-adjusted basis despite significant catastrophe losses. In addition, excess capital in the non-life reinsurance market has provided companies the ability to take advantage of market opportunities and offer new products, invest in innovation and pursue mergers and acquisitions (M&A). At the same time, AM Best is concerned that M&A can pose risks to a combined enterprise, as it can be utilized as a veil for ailing franchises. Still, M&A, if done prudently, should help improve the efficiency of the market’s overall capacity. Additionally, the excess capital continues to exert pressure on risk pricing and poses a drag on equity returns, but reinsurers that welcome alternative capital will thereby enhance their relevance with clients and investors and garner the ability to earn low-risk, fee-based income in the process.
Other factors that are driving the outlook revision include the fact that AM Best believes alternative third-party capital will hold the line on future return expectations following the catastrophe losses incurred in 2017 and 2018, although users of this capacity require more stringent credit governance over the level and release of collateral-backing loss payment obligations.
In addition, capital consumption and earnings volatility caused by tail events has declined, due in part to the increased utilization of third-party capital in retro-programmes and the growing alignment between traditional and third-party capital.
Furthermore, the rising interest rate environment could lead to alternative investment opportunities for third-party capital. Rising interest rates could cause mark-to-market losses for bond portfolios, but reinsurers could benefit from higher yields if they manage their duration profiles prudently.
AM Best also noted that there is a renewed emphasis on underwriting discipline driven by potential loss cost inflation, coupled with lower loss reserve redundancies.
