The reinsurance sector continues to “skip along the bottom of the market” with no signs that rates are going to meaningfully improve anytime soon, according to ratings agency A.M. Best.
A.M. Best’s recent report on the global reinsurance landscape states that optimism over a turn in the market following the large losses in 2017 has quickly faded, underlined by disappointing, albeit improved January and mid-year 2018 renewals.
According to the ratings agency, “the reinsurance sector continues to skip along the bottom of the market with no clear trigger for a meaningful and widespread rate hardening.”
One of the main drivers of muted rate increases during 2018 following the large losses of 2017, was the influence of alternative reinsurance capital. Alternative, or third-party reinsurance capital continued to expand in the aftermath of 2017 cat events, ultimately keeping rate rises down and contributing to the ongoing supply/demand imbalance that has been evident in the reinsurance sector for some time now.
The ratings agency states that it is maintaining its negative outlook on the global reinsurance sector, and estimates the market segment recording a combined ratio of 94.8%, and a return on equity of roughly 8% for the full-year 2018, assuming a normal level of catastrophes.
Robert DeRose, senior director, A.M. Best, commented: “Property catastrophe pricing is somewhat at the mercy of the alternative capital market and is not as heavily influenced by the traditional reinsurance market as historically has been the case.
“This is an important distinction with respect to current market dynamics. Any hope for near-term improvement in the market is directly correlated to the current level of excess capacity in the overall market today, which is being compounded by the continued inflow of alternative capacity.”
Interestingly, A.M. Best notes that while rate improvements have failed to live up to expectations, terms and conditions did stabilise, although, still remain below expectations for producing a reasonable risk-adjusted return relative to the average cost of capital, for the majority of reinsurance companies.
The bottom line of some players should be positively impacted by improvements in interest rates, although the benefits are expected to emerge slowly, says A.M. Best.
Scott Mangan, associate director, A.M. Best, commented: “Much uncertainty remains at this point and the existing risks to the market remain in play—as do one-off risks such as the potential fallout from Brexit and a global trade war and what these may mean to the global economy.”
The ratings agency states that going forward, the new normal for reinsurance firms appears to be one with lower underwriting returns, while fee income is expected to increasingly contribute to profits.
Reinsurers that are able to better manage market pressures will be those that have been conservative in underwriting and reserving, have remained relevant and adjusted their business models, and that have embraced alternative reinsurance capital, says A.M. Best.
