Despite the impacts of third-quarter 2017 catastrophe events expected to improve reinsurance market conditions, uncertainty surrounding the level of price increases and how sustainable any market improvement might be has led A.M. Best to maintain its negative outlook for the sector for 2018.
Heading into the January 1st, 2018 renewals season the balance sheets of global reinsurers remains robust and the market was able to absorb the high level of catastrophe losses experienced in 2017, says A.M. Best.
But despite this, investment returns remain woefully low and the pressures of the softened market combined with intense competition from both traditional and alternative sources of capital, with earnings prior to the eventful third-quarter already being depressed when compared with historical trends.
As a result of market conditions in 2017 and the high level of catastrophe losses, A.M. Best estimates a combined ratio of approximately 110% and a return on equity (RoE) of -1% for the full-year 2017, for its group of global reinsurers.
From 2012-2017, A.M. Best estimates a RoE of approximately 8% for its group of reinsurers, which, also excludes the potential for further adverse loss reserve development.
An estimated $100 billion insured loss bill from third-quarter catastrophes alone, combined with the Northern and Southern California wildfires and other catastrophe events of the year, is expected to drive improved reinsurance rates at the upcoming renewals.
However, A.M. Best has warned that the influence of alternative reinsurance capital, which continues to grow its share of the overall reinsurance market pie, is likely to influence property catastrophe pricing. Warning that any near-term market improvement might be short-lived, in light of the high level of excess capacity in the marketplace.
Despite holding a negative outlook for the global reinsurance market in 2018, the ratings agency states that an improving global economy, higher cession rates, and more merger & acquisition (M&A) activity could see A.M. Best revise its outlook to stable from negative.
“A potential increase in demand from government risk pools such as the National Flood Insurance Plan in the United States, as well as opportunities in cyber, mortgage and other emerging risks should allow for greater utilization of available market capacity,” said Robert DeRose, Senior Director, A.M. Best.