Global reinsurance companies are faced with a new market reality of lower returns and increased dependency on underwriting for profits, explains ratings agency A.M. Best.
The softened reinsurance landscape has persisted for some time now, and reinsurers are finding it increasingly difficult to achieve the kind of returns on their underwriting business as they have been used to in the past, while the ongoing low-interest rate environment continues to dampen investment returns.
“The new reality for the reinsurance market will reflect an industry where returns are less impressive and underwriting will have to become a larger contributor to profits and returns, leading to a more cautious risk selection, more diversification of product offerings, a wider geographic reach, and conservative loss picks,” said A.M. Best, in a recent reinsurance market briefing.
The notion of the reinsurance industry transitioning to a new reality of lower, but more stable returns was discussed by industry analysts and observers throughout last year, driven in part by the continued expansion and apparent permanence of the flood of convergence capital.
A number of industry players have said that the reinsurance market cycle could become much flatter than previously witnessed, as the wealth of traditional and alternative reinsurance capital both in and outside the space, will most likely be sufficient to fill any capacity shortage post-event, ultimately limiting any post-event pricing surge.
The new reinsurance market reality highlighted by A.M. Best, coupled with companies’ ability to take advantage of the flood of efficient, new capital from investors that might not have the required reinsurance and underwriting expertise, “could actually lead to significant success for some, although not everyone will win in the end.”
With returns expected to remain under pressure throughout 2017 the need for efficiency and discipline remains paramount, but it’s also important that companies continue to try to take advantage of the range of willing and able alternative reinsurance features and capacity in order to boost diversification and expand their remit, ultimately utilising a range of risk transfer tools to their benefit.
“The solid players will be those that have been conservative in underwriting and reserving, have been able to develop a book of business that will remain relevant for today’s market and allows for quick shifts in and out of lines of business depending on market conditions, as well as companies that have created expertise in managing third-party capital to their own advantage and are capable of participating in the new era of consolidation without being left out of the game,” concludes A.M. Best.
