Rating agency AM Best has maintained a stable outlook on the global reinsurance industry for 2021, as positive pricing momentum and tighter terms and conditions continue to offset negative factors.
Analysts currently believe that market hardening will continue for at least two more years, which should help to balance against uncertain claims reserve developments, social inflation, and COVID-19 losses.
At the same time, the improving pricing environment and market discipline, the re-assessment of the role of third-party capital providers following the impact of loss creep and trapped collateral, as well as the ongoing stability in the global life reinsurance segment, are viewed as positive factors.
AM Best’s analysis broadly supports recent comments from Fitch Ratings, which decided to change its outlook for global reinsurance from negative to stable earlier this month.
“The COVID-19 pandemic has added more uncertainty to a segment that has experienced increased loss activity in recent years,” AM Best noted. “As a result, reinsurers’ ability to rely on favorable prior-year reserve development has been diminishing steadily.”
Further uncertainty is being driven by the model accuracy of supposedly well-understood risks such as well as the uptick in harder to model risks such as wildfires and cyber.
Over the first nine months of 2020 the life segments of global reinsurers have reported negative impacts on profitability due to COVID-19-related claims, but this impact is typically much smaller in magnitude than it is for their non-life books of business.
AM Best’s most-recent estimate of dedicated reinsurance capital exceeds the $470 billion at year-end 2020, including approximately $85 billion of third-party capital, a figure that has stabilized after several years of rapid expansion.
Third-party capital inflows had been driving excess capacity and contributing to reinsurers’ struggle to meet their cost of capital, but rising frequency and claims amounts have disrupted those dynamics, and issues related to trapped capital and loss creep have forced some third-party capital investors to re-assess their positions.
AM Best also noted a number of capital-raising initiatives this year, as well as the entrance to the market of several startups expecting to benefit from the pricing momentum.
However, analysts warned that not all companies will be able to take advantage of improved market conditions, with business mix and recent underwriting performance likely to play a role.
“Financial strength, reputation, market position, product diversification, healthy balance sheets and consistent and transparent underwriting performance may prove to be the differentiators between winners and losers,” AM Best concluded.
