Some re/insurance industry experts and analysts have been extolling the much awaited possibility of a bottoming out of the re/insurance pricing cycle after record-setting 2017 losses and ensuing uptick in some January 2018 rates, A.M. Best however called long-term optimism “foolhardy” given the abundant levels of reinsurance capacity.
The rating agency highlighted in its latest Special Report that the market remains in a state of oversupply of capital, with third-party capital growing its market share and any alternative capacity lost after 2017 catastrophes having quickly been replaced.
In 2017, dedicated reinsurance capacity, including $82 billion of convergence capacity, is expected by A. M. Best and Guy Carpenter estimates to increase to $427 billion when compared to 2016 – demonstrating the scale of capacity growth in the sector.
“Convergence capital, which includes industry loss warranties, collateralized reinsurance, and cat bonds, continued to enter the reinsurance market, even as losses were being tallied from the events of 2017.
“Cat bond issuance continued to grow strongly through year-end 2017.
“Likewise, capital continued to flow into some collateralized reinsurance vehicles and sidecars. Traditional rated balance sheet capacity remained flat for 2017, as overall earnings were expected to be at breakeven and capital management strategies tempered due to the underwriting losses that were sustained,” explained A.M. Best.
These capital inflows have pushed reinsurers into a continuous trend of adaptation in their roles as gatekeepers of insurance risk; carriers now have to work out how to manage risk sharing and alignment with alternative capital for property and non-property classes of business.
To offset disruption and growing competition and deal with their changing role in the marketplace, firms are seeking to build larger, global, and well-diversified operations with broad underwriting capabilities to “assess risk and to serve as transformers of risk to the capital markets,” said A.M. Best, pointing to the combination of Validus and AIG as an example of the trend.
Reinsurers claim to retain their relevance to insurers by being best placed to match risk with the most appropriate form of capital, however, ultimately A.M. Best believes as disruption and disintermediation continues to run its course, “this tug of war will result in fewer hands in the pot.”
With the industry facing ongoing pressures and the challenge of disruption, hopes of a change to the pricing cycle over the long-term could be premature; market conditions are expected to favour purchasers and policyholders, driving consolidation and sustaining M&A activity, especially among smaller players.
