Reinsurance News

Companies struggling to meet cost of capital: AM Best

8th December 2020 - Author: Charlie Wood

With the average return on equity measures having declined consistently since 2014, AM Best sees this year and the next as critical for reinsurers, both in terms of challenges and opportunities.

am-best-logoAnalysts note how the situation is even more pressing given that 3% to 4% of the performance during the period is attributable to favorable loss reserve development.

Based on AM Best’s most recent estimates, dedicated reinsurance capital is expected to reach in excess of $470 billion by the end of 2020. This figure includes approximately $85 billion of third-party capital, a figure that, after several years of rapid expansion, has somewhat stabilised.

In the last few years, AM Best says the level of capital utilization has fluctuated +/-5% around 80%.

Given the level of excess capacity already evident in these numbers, analysts think that the new market entrants, while not insignificant in size individually, are unlikely to shift pricing trends for the market as a whole.

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AM Best believes the low interest rate environment is likely to continue, which would be consistent with ongoing government efforts to stimulate economic recovery post- COVID-19.

Meanwhile, any material gains in the stock markets for certain sectors are unlikely to drastically change the investment risk appetite of most players, because of the associated volatility and the relative conservatism of most insurers’ investment strategies.

While market conditions are clearly improving, AM Best says there are looming concerns. Some of these include insufficient rate adequacy for certain US casualty lines, a steady decline in favorable reserve releases, and the prolonged low interest rate environment.

The collective effect of these factors should lead to additional focus on underwriting discipline; failure to react to these pressures could adversely affect the segment.

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