Positive rate momentum across a broad range of non-life classes of business, combined with a stable market landscape in the global life segment, has led A.M. Best to maintain its stable outlook for the global reinsurance sector.
In a new report, the ratings agency notes that while the operating and competitive landscapes of both the non-life and life reinsurance segments are distinct, overall, the resulting diversification benefits the global reinsurance sector’s earnings.
A.M. Best explains that in light of higher losses from natural catastrophes in recent years, coupled with attritional losses in U.S. casualty lines and a slowdown in the entry of third-party capital, non-life reinsurance pricing is starting to gain more favourable momentum.
Of course, the ongoing COVID-19 pandemic is a concern for reinsurers and it’s expected that the market will be exposed across some lines, but according to A.M. Best, the segment’s robust risk-adjusted capitalisation means reinsurers are in a good position to absorb any potential COVID-19 losses on both the underwriting and investment side of the balance sheet.
“To a large extent, the degree of losses will be dictated by the duration of the pandemic. The carriers with the greatest potential for insured losses are in the specialty classes of business, such as event cancelation. Reinsurance contracts generally contain exclusions for losses that result from contagious diseases of pandemics and actions of civil or military authorities.
“Barring regulatory, judicial, or legislative action that could change contract terms and conditions, segment losses should be manageable and with risk tolerances,” explains the ratings agency.
While expectations from analysts suggest a limited impact from the global coronavirus pandemic, clearly, the outcome remains very uncertain and only time will tell exactly what the financial cost will be for the reinsurance sector.
As well as the sector’s strong risk adjusted capitalisation, A.M. Best highlights a number of other facts supporting the outlook. Amongst these factors is the ongoing alignment between third-party and traditional reinsurance capital, improved pricing momentum, increased discipline to generate underwriting profit, and also the potential for heightened demand from buyers as a result of the market volatility caused by COVID-19.
“Greater use of reinsurance by cedants, new risk transfer opportunities, and M&A all providing greater growth opportunities,” says A.M. Best.
Ultimately, the non-life reinsurance business model will continue to evolve and A.M. Best states that those companies who welcome alternative capital will enhance their relevance and be able to generate low-risk, fee-based income.
As well as holding a stable outlook for the non-life space, the ratings agency has also maintained its stable outlook for the global life reinsurance industry, with strong capitalisation again being a factor. Other significant factors supporting the outlook include the sector’s advanced modelling capabilities, equipped to handle a 1-in-200 year mortality event, the offering of services beyond risk transfer, and an operating performance that may still benefit from an expanded portfolio.
In contrast, uncertainty surrounding the full impact of the ongoing COVID-19 pandemic, and regulations that could raise capital requirements, are countervailing factors to the market segment outlook, says A.M. Best.
Commenting on the potential impact from COVID-19 on the global life reinsurance market, A.M. Best says: “Given the life reinsurers’ focus on biometric risks, mortality risk is a critical factor with regard to COVID-19. Currently, even the most conservative estimates suggest that the number of fatalities (based on the currently available information and resulting trajectories) will be well below a 1-in-200 year pandemic, the scenario most reinsurers use for capital stress testing purposes.
“The actual numbers, though, will depend on how effective government actions are at containing and slowing the spread of infections and the local ability to treat severe cases.”
