Global ratings agency A.M. Best has revised its outlook for the global reinsurance industry to stable from negative for 2019, driven by the convergence of traditional and third-party, or alternative reinsurance capital among non-life players.
The ratings agency’s revised outlook is also a result of more stable pricing, albeit at levels below long-term adequacy, a rising interest rate environment, growth opportunities and also ongoing stability within the global life reinsurance sector.
According to A.M. Best, alternative reinsurance capital is expected to hold the line on future return expectations as a result of the catastrophe losses experienced in 2017 and 2018.
“In addition, excess capital in the non-life reinsurance market has provided companies the ability to take advantage of market opportunities and offer new products, invest in innovation and pursue mergers and acquisitions (M&A).
“AM Best is concerned that M&A can pose risks to a combined enterprise, as it can be utilized as a veil for ailing franchises. Still, M&A, if done prudently, should help improve the efficiency of the market’s overall capacity,” says A.M. Best.
At the same time, capital consumption and earnings volatility driven by tail events has fallen, which is in part down to the use of alternative capital in retrocession programs and the continued blurring of the lines between traditional and third-party capital.
“Additionally, the excess capital continues to exert pressure on risk pricing and poses a drag on equity returns, but reinsurers that welcome alternative capital will thereby enhance their relevance with clients and investors and garner the ability to earn low-risk, fee-based income in the process,” says the ratings agency.
The rising interest rate environment could also lead to alternative investment opportunities for third-party capital. And, A.M. Best notes that rising interest rates could also result in mark-to-market losses for bond portfolios, adding that reinsurance companies could benefit from higher returns if they are able to prudently manage their duration portfolios.
Further supporting its revised outlook to stable for the global reinsurance sector, A.M. Best states that a renewed emphasis on underwriting discipline that is a direct result of potential loss cost inflation, is combining with lower loss reserve redundancies.
Demand for reinsurance protection is also on the rise, especially in the U.S. as a result of ongoing economic growth in the region. There’s potential for greater reinsurance demand from government risk pools, says A.M. Best, as well as emerging opportunities in both the cyber reinsurance and mortgage reinsurance space.
Regarding the life segment, A.M. Best says that life reinsurance companies are witnessing growth opportunities in emergency markets, and also as a result of Solvency II across Europe.