Signs of market bottoming outweighed by pressures; AM Best maintains negative outlook on global reinsurers

Continued market challenges will hinder the potential for positive rating actions and may translate into negative rating pressures in 2017, AM Best said as it is maintaining its negative outlook for the global reinsurance market.

Profitability continues to be under strain, the rating agency said, which has been evident in reduced risk-adjusted returns and market headwind. The rating agency said these present significant longer-term challenges.

“Recent indications of a market bottoming are slowly emerging, but the overall operating environment remains negative, which is concerning,” said Robert DeRose, senior director at AM Best.

Low rates, broader terms and conditions, and the unsustainable flow of net favourable loss development are all negative factors which AM Best has said will continue to adversely impact risk-adjusted returns over the longer term.

Additional pressure has come from alternative capital, which now makes up for around 20 percent of the dedicated global reinsurance market capacity.

According to AM Best, this percentage has been steadily growing year-on-year, and underscores why cycle management has been a key strategy for organisations possessing the capability to move between primary and reinsurance platforms.

The strength of balance sheets – although they are currently well-capitalised and capable of withstanding various stress scenarios – may also erode over time for some carriers.

AM Best said this erosion occurs as earnings come under increased pressure, favourable reserve development wanes, earnings grow more volatile, and the ability to earn back losses following events is prolonged by the instantaneous inflow of alternative capacity.

“These issues have placed unrelenting pressure on underwriting discipline, forcing insurers to exercise restraint or risk long-term viability,” DeRose added.

AM Best commented: “Companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better-positioned to withstand the pressures in this difficult operating environment and have greater ability to target profitable opportunities as they arise.”