Best: Reinsurance Market Stable
The global reinsurance market remains stable despite “numerous challenges” facing Bermuda and its global competitors in the field, according to international ratings agency A.M. Best.
In a new report issued today [Jan. 9], analysts say this is due to continued strong risk-adjusted capitalisation, prudent enterprise risk management practices and an improving pricing environment across a broadening spectrum business classes.
Over the past two years, Bermuda and the rest of the international reinsurance sector has incurred losses of $50 billion from catastrophic events but these events were manageable from a capital perspective.
Best said: “While a different set of market conditions certainly would be preferable, the reinsurance sector has been adaptable, resilient and stable during these challenging times.”
The Best analysts believes the market “seems poised for a turn”.
Over the past five years, reinsurers generally experienced declining demand for reinsurance capacity as primary companies increased retentions across the board.
Global catastrophes, increased volatility of assets and updated catastrophe models have brought about a change in primary companies’ perception of risk, according to A.M Best.
This increased awareness of risk, combined with growing regulatory pressures on solvency margins, appears to have turned the tide on demand for reinsurance, especially in loss-prone regions of the world.
This increasing demand for reinsurance cover has helped to bolster current pricing for property catastrophe-related business.
A.M. Best stated these dynamics, coupled with capital management strategies, will lead to improved pricing, terms and conditions that will support a low double-digit return on equity in 2012 and continue to support reasonable organic growth in capital, assuming a normal level of global catastrophe losses.
It is concerned, however, that the positive momentum in reinsurance pricing may be short lived.
Best explained:“History has proven that the market has a short memory, and if the sting of recent loss events quickly fades, the soft market may return.
“In that scenario, the capital strength of the segment would slowly erode, and A.M Best would consider revising the ratings outlook to negative, as pressure on ratings would be expected to mount.
“The issues overhanging the reinsurance market — pricing pressures, low investment yields and a limited cushion of loss-reserve releases available to mask deteriorating earnings — have lingered for several years now. The macroeconomic issues have created an environment where significant volatility in assets is considered the norm.”
