Global reinsurers face ‘considerable uncertainty’ in 2018: AM Best

Rating agency AM Best is holding its 2018 outlook for the global reinsurance sector at negative, citing the considerable uncertainty surrounding the level and sustainability of any market improvement.

Earnings going into third-quarter 2017 had already been depressed compared with historical trends because of ongoing market challenges. Combined with lacklustre investment returns, this has served to drag operating and overall performance to a level just marginally sufficient to cover the average cost of capital for many reinsurance-predominate companies. The negative impact of catastrophe losses on underwriting earnings in 2017 has further eroded the segment’s historical earnings, according to a report titled “Market Segment Outlook: Global Reinsurance”.

Property catastrophe pricing is at the mercy of the alternative capital market and is not as heavily influenced by the traditional reinsurance market as historically has been the case, and that any near-term market improvement may be relatively short-lived given the current level of excess capacity in the overall market.

AM Best estimates a combined ratio of approximately 110 percent and a return on equity of -1 percent for the full year 2017 for its global reinsurance composite, and a “meagre” five-year average (2012-2017) return of equity of approximately 8 percent. This does not factor in the potential for further adverse loss reserve development, the rating agency said.

The briefing also notes potential factors that could favourably impact the reinsurance market over the near term, and that may be sufficient cause for AM Best to revise the outlook to stable from negative, including an improving global economy, rising cession rates and further merger and acquisition activity.

“A potential increase in demand from government risk pools such as the National Flood Insurance Plan in the United States, as well as opportunities in cyber, mortgage and other emerging risks should allow for greater utilization of available market capacity,” said AM Best senior director Robert DeRose.

Companies with robust balance sheets, diverse business portfolios, advanced distribution capabilities and broad geographic scope are better-positioned to withstand the pressures in this difficult operating environment and have greater ability to target profitable opportunities as they arise, according to AM Best.

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