“Doing the right things” might not be enough for reinsurers: A.M. Best

Global financial services ratings agency A.M. Best has delivered a stark warning to reinsurers, stating that in the current softening landscape, comprehensive strategies and discipline might not be enough for some to endure further challenges.

Reinsurers in all corners of the world remain under significant pressure from a range of ongoing market headwinds that has ultimately reduced profitability on the underwriting side of the balance sheet. And with investment rates remaining near historically low levels, the testing times are expected to persist further in 2016.

In response to continued rate deterioration and limited investment gains, reinsurers have been seen to adopt new and divergent strategies in an attempt to offset some of the implications driven by the softening landscape.

However, according to David Blades, Senior Industry Research Analyst at A.M. Best, even this might not be enough for some to withstand mounting reinsurance market pressures.

“Even doing the right things may not insulate reinsurers from tough times ahead. Despite sound strategies, not all reinsurers will survive or excel in the end.

“Global reinsurers that have established a strong foundation of proven, effective underwriting and reserving principles, especially those with diversified portfolios, will have the best chance to remain relevant and profitable in the current market,” said Blades.

It’s a blunt, but important and necessary warning to global reinsurers that operate in current market conditions. While those with prudent reserving practices and disciplined approaches to underwriting might well be able to navigate the testing market landscape more easily than some of their counterparts, the challenges ahead might still prove too much for some to cope.

Furthermore, the message from A.M. Best is a greater warning to those that perhaps haven’t been as disciplined during recent renewal seasons.

To offset the challenging reinsurance marketplace some in the space have been seen to aggressively release reserves in order to bolster returns, ultimately masking true underwriting profitability, and also relax terms and conditions (T&C) and include unmodelled, poorly-understood exposures in order to fight off competition.

In the near-term, and absent any major catastrophe losses or any significant accumulation of losses, loosening T&Cs and ill-disciplined underwriting might well work in the favour of some.

However, when catastrophe losses normalise once again, which they undoubtedly will at some point, and with reserves diminishing owing to low catastrophe losses in prior years and aggressive releasing, some firms could find themselves in a very difficult, possibly insolvent situation in the future.

“Reinsurers that may have been over-aggressive in amassing exposure to risks on an aggregate all-perils or worldwide basis, are susceptible to weather-related volatility, and may find their results adversely impacted as losses accumulate over the near-term,” said Blades.

Catastrophe losses have increased somewhat in the opening months of 2016, with the Fort McMurray wildfires and other catastrophe events causing insured losses in the billions of dollars. However, A.M. Best notes that it remains unclear if these events will be enough to remove enough of the capacity, which is increasingly coming from alternative reinsurance providers, in the space, and result in any meaningful rate improvements in the property catastrophe space.

Despite a noted deceleration of rate declines at the January 1^st, and April 1^st renewal periods, A.M. Best states that this does “not appear to have spawned any significant hope that price stabilisation is on the horizon anytime soon.”

It’s important that reinsurers remain disciplined in these challenging times, and resist business that might result in overexposure, or that is too poorly priced. The softening landscape has played into the hands of cedents, with insurers and reinsurance buyers benefiting from the low-cost reinsurance protection available.

But as noted by A.M. Best, remaining disciplined and building strong relationships that can help reinsurers achieve more desirable T&Cs and even rates, will likely be key to those that survive the soft market conditions and ultimately remain relevant to the industry, moving forward.