A.M. Best On Global Reinsurance Outlook

December 17, 2016

A.M. Best is holding its outlook for the global reinsurance sector at negative, citing the “continued market challenges that will hinder the potential for positive rating actions over time and may eventually translate into negative rating pressures.”

A statement from the ratings agency said, “The Best’s Briefing, titled, “Global Reinsurance Outlook Maintained at Negative,” states that the strain on profitability is evident in reduced risk-adjusted returns with market headwinds at this point, presenting significant longer-term challenges.

“Recent indications of a market bottoming are slowly emerging, but the overall operating environment remains negative, which is concerning,” said Robert DeRose, senior director, A.M. Best.

“Negative factors such as low rates, broader terms and conditions, the unsustainable flow of net favorable loss development and anemic investment yields will continue to adversely impact risk-adjusted returns over the longer term.

“Alternative capital also looms as an additional pressure-bearing front and now comprises approximately 20% of the dedicated global reinsurance market capacity. This percentage has been steadily growing year over year, underscoring why cycle management has been a key strategy for organizations possessing the capability to move between primary and reinsurance platforms.

“While rated balance sheets are currently well-capitalized and capable of withstanding various stress scenarios, this strength may erode over time for some carriers as earnings come under increased pressure, favorable reserve development wanes, earnings grow more volatile, and the ability to earn back losses following events is prolonged by the instantaneous inflow of alternative capacity.

“These issues have placed unrelenting pressure on underwriting discipline, forcing insurers to exercise restraint or risk long-term viability,” DeRose said.

“In A.M. Best’s view, companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better-positioned to withstand the pressures in this difficult operating environment and have greater ability to target profitable opportunities as they arise. “

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