While the outlook for the global reinsurance industry remains stable, rating agency A.M. Best warns that market hardening needs to continue for at least a couple of years in order to have a meaningful impact on the segments ability to sustainably make its cost-of-capital.
The rating agency said this morning that it has maintained its market segment outlook on the global reinsurance industry at stable for 2021.
Reasons for this include the currently positive reinsurance pricing momentum being seen, which combined with tighter terms and conditions promise to help the industry improve its underwriting returns, at least when losses remain average.
A.M. Best said that these two positive influences on its stable rating are somewhat offset by ongoing uncertainty over claims reserve development related to previous years’ property catastrophe events, as well as the impacts from social inflation, and more recently, business interruption and concern over potential casualty lines exposure related to the COVID-19 pandemic.
Getting back to more sustainable levels of underwriting return and profit are key, to help global reinsurance firms achieve their cost-of-capital over the longer-term.
A.M. Best believes that the current market hardening will likely need to continue for at least a couple of years, if it is to have a meaningful impact on the reinsurance segments fortunes.
In addition, the rating agency warns that pricing momentum needs to be sufficient to offset losses from previous years, including the impact of COVID-19 and the ongoing financial implications of social inflation.
Positively, the rating agency also cites, the improving pricing environment and evidence of greater market discipline, alongside the re-assessment of the role of third-party capital providers following the impact of loss creep and trapped collateral, plus stability in the global life reinsurance segment, which together are viewed as positive factors for the global reinsurance segment.
The ability of global reinsurers to rely on their prior year loss reserves to boost profits is diminishing, A.M. Best said, while at the same time the incidence and impacts of more challenging perils to model, such as wildfires, cyber risks and now pandemics, is growing.
On dedicated reinsurance capital, A.M. Best sees this as relatively static, with third-party or alternative reinsurance capital still sitting at around the $85 billion by their measure, and total sector capital somewhere just above $470 billion at the end of this year.
A.M. Best notes that third-party capital has stabilised, but has also now decided to blame third-party capital for contributing to reinsurers’ struggles to meet their costs-of-capital.
That’s not really a fair assessment in our view, given the major traditional reinsurers and property catastrophe specialists all competed just as heavily on price across the recent years of softening (more so in diversifying regions such as Europe and Asia) and have helped to erode their own returns as a result.
A.M. Best also notes new capital raising activities and the entrance of several startups looking to capitalise on pricing momentum in reinsurance.
However, the rating agency does not believe that these new entrants, while significant in size individually, will be able to change the pricing trend trajectory for the market as a whole.