Insurers and reinsurers across Western Europe have been able to bolster their capital positions thanks to the abundance of efficient traditional and alternative reinsurance capital, but the ability to deploy excess capacity in an extremely competitive marketplace remains, according to A.M. Best.
International financial services rating agency, A.M. Best, in a new report exploring the position and outlook for Western European insurance and reinsurance companies, underlines the ability of reinsurers to strengthen their capital positions in a challenging environment.
But while reinsurers in the region have been able to utilise an expanding base of efficient traditional and alternative reinsurance capital to boost their positions, deployment of excess capacity has been more of a challenge, said A.M. Best.
Rates in the global reinsurance industry have been declining for some time now and this continued at the recent January 1st renewal season, albeit at a slower pace than seen in previous years. At the same time, the marketplace remains overcapitalised and with opportunities to deploy capital few and far between, driven by intense competition and the soft operating environment, a supply/demand imbalance continues to engross the sector.
“In A.M. Best’s opinion, this will continue to remain a theme in 2017, as more capital will be made available following the United States’ covered agreement with the E.U. to eliminate collateral and local presence requirements for U.S. reinsurers operating in the E.U. insurance market.
“…eliminating these barriers to trade will make it easier for U.S. companies to operate in the E.U. and this increased competition and more abundant capital in Western Europe is credit negative,” said A.M. Best.
The impact of the recently announced transatlantic reinsurance agreement between the EU and the U.S. has been debated by a number of industry analysts and experts, and has so far attracted some divergent opinions. But A.M. Best clearly feels that the deal will stress an already overly competitive and overcapitalised operating landscape, for the European players at least.
“Western European markets will see relatively modest economic growth, so expansion of insurance business volumes will be sluggish at best,” said A.M. Best.
Any rise in insurance penetration across Western Europe typically results in increased demand for reinsurance protection, so that growth will be minimal for primary players suggests that reinsurers will need to continue to show discipline in order to improve efficiency and bolster returns.
“While capital is not a great cause of concern, earnings are under pressure with limited growth opportunities.
“Given these pressures, seeking greater operational efficiency becomes one the main options to improve the bottom line,” said A.M. Best.
