The outlook for the global reinsurance sector in 2014 remains stable, according to ratings agency A.M. Best, despite the overcapacity in the market created by well-capitalised traditional players and the influence of alternative capital.
A stable outlook means that A.M. Best expects the majority of its rating actions on global reinsurers will be affirmations, rather than upgrades or downgrades, over the next 12 to 18 months. Underpinning this is the robust capital position of rated reinsurers, strong enterprise risk management and an improving economic outlook.
However the market faces overcapacity, according to A.M. Best Co. Vice President Robert DeRose, partly from the well-capitalised traditional reinsurance players but exacerbated by the influx of alternative capital from the likes of pension funds, hedge funds and other capital markets players.
DeRose also highlights the light catastrophe year, reduced demand from ceding companies who are retaining more business, which combined with the overcapacity is creating a supply and demand imbalance in the global reinsurance market.
A.M. Best has noticed reinsurers being more selective with the property catastrophe business they underwrite and deploying more capacity into longer tail lines. However, DeRose stressed that this is only a subtle shift in product and portfolio mix as the rate environment is challenging in non-property lines of business as well.
A.M. Best said in its global reinsurance outlook report that there is too much capital chasing the same opportunities and that this has put pressure on reinsurance pricing as well as terms and conditions. With third-party capital taking the higher layer opportunities and primary insurers increasing their retentions, reinsurance companies seem to be stuck in the middle, A.M. Best explained.
While this risk-sharing battle between primary retentions and reinsurers looking for well-priced opportunities to deploy capital is important it is very different to the inflow of capital from insurance-linked securities (ILS), collateralized reinsurance structures and even rated balance sheets, said A.M. Best.
The external threat from third-party capital, with vast amounts of money potentially available, is of concern and, A.M. Best said, ‘could be the game-changer going forward’. In this environment, reinsurers with primary insurance arms and the ability to manage third-party capital are the best positioned to succeed, Best explained.
Reinsurers returns are destined to be squeezed in the year ahead, with underwriting margins under pressure from competition and low investment yields. A.M. Best expects reinsurers to produce average returns in the high single digit range, including the benefit of prior year reserve releases. Despite the lacklustre returns, A.M. Best expects risk-adjusted capital will remain strong as reinsurers look to reduce exposures to less attractively priced, volatile business.
A.M. Best’s outlook suggests a stable year for reinsurers, but with the ever present threat of increased participation from third-party capital a potential game-changer waiting on the sidelines of the reinsurance market. In such an environment, diligence and sensible underwriting will be key to ensure that no over-exposure is being assumed by reinsurers which may feel under threat.
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