New business opportunities and alignment with third-party capital are among a number of tailwinds that are expected to help the reinsurance sector maintain its stable outlook into next year, according to Stefan Holzberger, Senior Managing Director and Chief Rating Officer at AM Best.
Speaking as part of AM Best’s recent ‘Insurance Market Briefing – Europe’ conference in London, Holzberger outlined the rating agency’s perspective on the global reinsurance industry, and hinted at its outlook for the sector heading into 2020.
Holzberger noted that there was a lot of optimism in the market on the back of hardening rates for loss-affected accounts, but cautioned that pricing was coming “from a really low point” and did not yet constitute a hard market.
AM Best has also observed a trend of worsening technical profitability, he said, with combined ratios steadily ticking up as a result of price competition and expansion of terms and conditions.
The last two years have been a particularly challenging period from a property catastrophe standpoint, Holzberger added, with unprecedented catastrophe losses in 2017 which then weighed down 2018 numbers through loss creep and adverse reserve development.
“There’s been a lot of talk in the market about trapped capital,” he told attendees at the AM Best conference. “There’s certainly a concern amongst third party capital providers in terms of the credibility of the models that have kind of let them down, you might say, over the last couple of years in terms of the model result versus the actual result.”
“And just generally the margins that are available on insurance-linked securities, and collateralized reinsurance programs, those margins have been compressing, and I think there’s a realization from these third party capital providers that those margins are just really not acceptable. So there’s a pullback there.”
However, Holzberger maintained that this trend was “a very positive development” for the health of the overall reinsurance market.
On a similar note, he said that the alignment between traditional and third-party capital was a key factor in helping to restore the market to sustainable profitability.
“The traditional players are really leveraging that capital to help manage their balance sheet and manage their businesses, and that’s proven very successful over two very challenging years from a nat cat perspective,” he explained.
Additionally, AM Best is anticipating continued improvements to pricing discipline for property, catastrophe, retrocession, and for casualty, which is trending at above break-even technical profitability.
“You really see some pricing improvement across generally all lines of business which is real positive,” Holzberger said.
These positive factors, in combination with mixed levels global economic growth, should help to offset the headwinds faced the reinsurance sector and enable it to maintain a stable outlook, Holzberger concluded.
“We’re monitoring the headwinds, and we feel they’re under control currently,” he said. “There’s a lot of positives in the market and a lot of positive momentum coming into one 1/1 2020 renewals, and for that reason, we’ve assigned a stable outlook for the market.”
AM Best went from negative to stable on its outlook for the reinsurance market in December 2018, and is due to provide a formal update next month.