The current excess or glut of reinsurance capital, which continues to build while global loss experience remains benign, is expected to ultimately weigh on property and casualty (P&C) insurance share prices, according to rating agency A.M. Best.
The growing size of the available pool of global reinsurance capital is both a positive and negative factor for P&C insurers, according to A.M. Best.
On the one hand the availability of reinsurance capital and capacity has never been better. Nor has the range of options available to P&C insurers looking for reinsurance, with growing alternative options from insurance-linked securities (ILS) specialists, as well as new markets with less traditional business models.
The increase in capital flowing into the reinsurance market, from both traditional and alternative sources, has led to a decline in the pricing of reinsurance capacity and made it easier for P&C insurers to better protect their balance-sheets, transfer risk and to free up capital.
On the other hand, the growing capital in reinsurance has ramped up the competition in that market, which has increasingly pushed reinsurance players, or those companies operating in both primary insurance and reinsurance lines, to divert additional capital to P&C insurance business.
That has increased competition for P&C insurance companies and also is beginning to pressure rates, with commercial P&C pricing in particular flat over recent months. Previous year’s rate increases are believed to be coming to an end, particularly for these commercial lines, A.M. Best said.
A.M. Best continued to say that it sees P&C insurer valuations as elevated and that it expects the “more normal pricing environment to begin to affect profitability during the rest of 2015.”
The rating agency would also expect catastrophe losses to return to more normalised levels, which will result in an uptick of P&C insurer combined ratios, which historically have averaged 95.1% but currently sit at an average of 93.3% due to low loss impacts.
With investment yields also expected to remain depressed, due to global interest rates and economic factors, A.M. Best is warning that as long as the reinsurance market remains well-capitalised and full of competition, it is likely to have a negative knock-on effect on P&C insurance companies.
One other issue that P&C insurers may need to watch out for, is the increasing desire of ILS managers and capital market investors to provide risk capital to back primary insurance business. If more fronting carriers successfully launch, it could allow additional capital into the re/insurance space which would directly increase competition for these insurers, as well as further boosting reinsurance capital.
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