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Transition to a stable reinsurance outlook dependent on profitability: A.M. Best’s Holzberger

17th May 2018 - Author: Luke Gallin

Stefan Holzberger, Chief Rating Officer, A.M. Best, recently said that the global reinsurance segment is in need of improved performance and greater profitability in order for the ratings agency to upgrade its segment outlook from negative to stable.

profitable-growth-reinsuranceSpeaking with A.M. BestTV at the 29th East Asian Insurance Congress (EAIC), Holzberger noted improved, albeit less than anticipated rate increases across the reinsurance sector after 2017 cat events, and attributed the presence of third-party capital as a dampener on price hikes.

A.M. Best’s outlook for the reinsurance segment has been negative for a number of years now, but in order for the ratings agency to upgrade its outlook for the industry, Holzberger underlined a need for improved profitability in a sector flooded with capacity from both traditional and alternative sources.

“So long as you have so much capital that is looking for a home, in terms of writing business, it is going to suppress rates,” said Holzberger.

Regarding the potential for the reinsurance segment’s outlook to improve to stable, Holzberger said: “It’s not a question of capacity or capitalisation that is available to be deployed in the market, it’s all about performance.

“And talking about looking forward over the next couple of years, what we really expect to see is just that pressure on the reinsurance sector’s ability to achieve an adequate return in relation to the risks that they are taking onto their balance sheets. So, really, that’s the issue.”

Ultimately, an improved risk adjusted return is needed in the reinsurance industry before A.M. Best is going to even consider adjusting its segment outlook.

Holzberger noted that this could be supported by interest rates ticking up slowly, which means better investment income for reinsurers, and also by the potential for the risk adjusted rate to rise. However, this is “so long as the prudent margin in terms of underwriting profit stays at a pretty relative stable spread above that risk adjusted rate,” said Holzberger.

For Holzberger, any changes to the reinsurance sector’s outlook is all about profitability, as he stressed how the segment’s capitalisation is well supportive of the credit quality it has assessed the segment today.

“You really have that dynamic of can these organisations achieve that profitability? They have the capitalisation, they’ve got the profile globally, it is really about that risk adjusted return that’s falling short, and to this point trending in the wrong direction,” said Holzberger.

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