Reinsurer margins to erode further, discipline paramount: A.M. Best

Global reinsurers continue to note reduced returns across the majority of new business with competition levels intensifying, says A.M. Best. Emphasising the need for practicing disciplined reinsurance underwriting to mitigate margin erosion.

Rating agency A.M. Best expects continued pressures for reinsurers moving further into 2016 as challenges mount across all segments of the U.S. property/casualty industry.

Persistent rate decreases in the global reinsurance and commercial insurance industry have challenged re/insurers profitability in recent times, increasingly compressing underwriting margins below acceptable returns.

“The reinsurance market has proven for some time to be a bit more resilient and disciplined than other sectors.

“However, most companies continue to indicate returns are lower for new business booked and intense competition is leading to reductions in premiums and a decrease in margins for certain lines of business; consequently, the need for disciplined underwriting should remain the focus,” says A.M. Best in a new special report on the U.S. property/casualty industry.

The reinsurance market has been overcapitalised for some time, driven by a lack of catastrophe loss events and the influx of alternative reinsurance capital in the space struggling to find its way outside of property catastrophe business, with its effects increasingly filtering down into primary insurance lines.

As a result rates have declined and coupled with intense competition across the majority of business lines, reinsurers are faced with limited opportunities to deliver the kind of underwriting profits they would desire, and A.M. Best expects further margin deterioration in the coming months.

“Margin compression will likely continue; however, there is evidence that the pace of deterioration in reinsurance rates, particularly in high layer U.S. property catastrophe, has begun to slow,” said A.M. Best.

Reports from a range of industry analysts and executives at 1/1 2016 highlighted a slowing of rate declines across the most pressured segments of the competitive property cat space, helped by a reduction in the flow of third-party reinsurance capital as investors looked to redeploy capacity into more profitable areas.

A.M. Best highlights this point; “Third-party capital continues to seek a larger piece of the pie, but the speed of capital market capacity entering the market, seems to have slowed as compared to the prior year and some collateralized markets have held capacity at unable to find suitable opportunities.”

The final point raised by A.M. Best here is a sign of market discipline, with certain collateralized markets resisting underwriting business just for the sake of underwriting, a dangerous trend that is perhaps more common during a softening market as players fight for market share.

Absent innovation and the entry into new risks or regions, or perhaps a significant catastrophe event, opportunities to deploy capital into business areas with required returns will be hard to come by during 2016, and disciplined underwriting now will likely be paramount to those that are shown to have succeeded when the market does eventually turn.

Knowing when to pullback on certain lines and when to enter others, along with a resistance to be pushed on pricing and transactional terms and conditions is the kind of discipline insurers and reinsurers will need to navigate the challenging market landscape.