Reinsurance may be ‘uglier’ than expected in 2016, negative outlook: A.M. Best

Insurance and reinsurance ratings agency A.M. Best, has maintained its negative outlook for the reinsurance sector in 2016 amidst ongoing market pressures, also suggesting that once disaster strikes the true impact of current market conditions “may be uglier than some believe.”

A recent industry briefing from ratings agency A.M. Best reveals that the firm continues to hold a negative outlook for the reinsurance space, “citing the significant ongoing market challenges that will hinder the potential for positive rating actions over time and may eventually translate into negative rating pressures.”

With ample capacity, a benign loss environment, persistently low interest rates, and stiff competition remaining the trends of the reinsurance industry as 2015 draws to a close, and with renewals just around the corner, it’s unsurprising that A.M. Best has maintained its negative outlook on the space.

“At this point, our view remains longer-term than our typical 12-18 months,” explains A.M. Best, stressing that “market headwinds at this point present significant longer-term challenges that industry players need to work through.”

Warning that its negative outlook is longer-term than typical, underlines that the firm believes the challenges driving the reshaping of the reinsurance market are significant, and it’s very unlikely that a turn in the softening market will take place anytime soon, perhaps even regardless of a large loss event.

Exacerbating the supply/demand imbalance in the reinsurance market, which is driven in part by the flood of alternative reinsurance capital increasingly gaining overall reinsurance market share, is a lack of catastrophe loss events, natural and man-made.

And while it’s perceived that several large events, or perhaps even an event of unprecedented scale could remove some of the excess capacity, potentially helping rates to return to more desirable levels, A.M. Best warns that a major catastrophe will also “reveal the true ramifications of current market conditions.”

As noted by other industry analysts in recent times, A.M. Best warns that reinsurers that have been relying on prior years’ reserve releases at a time of benign losses, which limits the opportunity to refill reserves post-event, to mask diminishing underwriting profits, might find themselves in a particularly tricky situation when disaster next strikes.

“If history is a guide, it may be uglier than some believe!” warns A.M. Best.

As noted above, this is a view held by numerous market participants and analysts, which have warned that eventually, as the benign loss landscape persists, reserves will diminish further and further and companies simply won’t be able to bolster quarterly results via reserves releases as much as before, bringing to light the true impact of current, tough market conditions.

Furthermore, as competition has intensified over the last 12-18 months and capital has remained plentiful, broader terms and conditions have been witnessed, another trend that as with imprudent reserve releasing can lead to significant over-exposures, something best avoided as market challenges sustain, and possibly intensify.

“Given where rate adequacy is, it will continue to take optimal conditions, including benign or near benign catastrophe years, a continued flow of net favourable loss reserve development, and stable financial markets to produce even low double-digit returns,” advises A.M. Best.

This further supports the belief from many in the industry that moving forward, reinsurers will likely have to get used to structurally lower, albeit more stable returns than they have been used to.

Looking forward A.M. Best expects further consolidation across the sector, as the search for scale and relevance remains a key sector theme, adding that it’s “likely that several franchises that exist today will be sporting the logo of another brand by the time this soft market has run its full course.”

“The companies that are not proactive will not lead their own destiny,” says A.M. Best.