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Reinsurers’ evolution must continue as challenges & uncertainty persists: A.M. Best

5th September 2017 - Author: Luke Gallin

The global reinsurance sector remains extremely challenging with limited opportunity for organic growth and declining profitability on both sides of the balance sheet, which, suggests reinsurers will need to continue adapting and evolving to the changing landscape, according to A.M. Best.

A.M. Best logoDespite the widespread impact of hurricane Harvey, which is yet to be fully understood until final economic and insured loss estimates are produced, the global reinsurance sector remains under significant pressure.

Rates are down, reserves are thinning, and for the most part, the catastrophe loss experience has been relatively benign, all while low interest rates continue to dampen investment returns.

Despite the impact of hurricane Harvey being expected to drive an insurance industry loss of up to $25 billion, according to some estimations, the high levels of industry capital means this is expected to be an earnings event, and that it won’t drive the turn in the market many had hoped for.

The industry is rife with competition from both traditional and alternative providers of capacity, and at the same time InsurTech and FinTech start-ups are looking to disrupt the industry and claim an increasing share of the marketplace.

Underlining just how much pressure the global reinsurance market is under in the current environment, A.M. Best, in a new global reinsurance report, reveals that at the end of 2016 the sector had booked an accident year combined ratio of 101%.

However, this was softened by the 95.2% reported combined ratio by the industry, but the fact remains that in 2016, the reinsurance sector booked at an underwriting loss.

A.M. Best, expands on this point; “That is the first time we’ve seen an accident year loss in over ten years, with the exception of 2011, which had several significant global catastrophes. Some may argue that the 101 combined ratio reflects conservatism in loss picks, but history generally proves otherwise, especially for longer-tail classes of business, the current focus for reinsurers.”

The return on equity and combined ratio of the international reinsurance industry have both deteriorated since 2013. A.M. Best says that it saw this coming and subsequently revised its outlook for the sector to negative. In fact, according to A.M. Best the industry’s return on equity fell to just above 8% in 2016, which is approximately 5% lower than where it was in 2013.

These results are very anemic, and with a normal catastrophe year the deterioration would be much more visible,” says A.M. Best.

Additionally, throughout the soft cycle reinsurance companies have been seen to utilise reserves to bolster weak underwriting results, which, alongside the benign loss experience has helped to mask some of the deterioration.

However, should losses start to normalise and with reserves reportedly already running thin for many in the space, some companies might not have much room to manoeuvre another renewal of rate declines, something that is expected at the January, 2018 renewals season.

“A.M. Best has significant concerns. If the reinsurance market is booking the accident year combined ratio at a loss in a relatively benign catastrophe year, and that in and of itself is not the impetus for change, the next logical question is: What will it take to turn the market?” says A.M. Best.

Considerable uncertainty remains as to what will trigger a turn in the global reinsurance market, and it could be that some companies experience a very, very challenging time before any turn in the pricing landscape is evident.

Amid the considerable uncertainty as to the timing and what exactly it will take to turn the market, the one certainty that remains is that reinsurers will have to continue to evolve, learning from their mistakes and successes. No doubt there may very well be some surprises that come along with that evolution,” says A.M. Best.

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