Global Reinsurers: Who Will Gain Despite Pain?

January 13, 2015

A.M. Best has released a new briefing providing its detailed perspective on the increasingly challenged global reinsurance market.

The Best’s Briefing, titled “Global Reinsurers: Who Will Gain Despite All the Pain?” explores how the A.M. Best composite of U.S. and Bermuda reinsurers is expected to perform in 2015, and contains an estimate of dedicated global reinsurance capacity.

The ratings agency said, “The briefing states that most companies continue to indicate that intense competition is leading to lower underwriting margins for certain lines of business. As a result, A.M. Best believes that the need for disciplined underwriting now more than ever should remain the focus. The market is expected to remain challenging in 2015, with rates continuing to decline for some lines of business, terms and conditions becoming even broader and ceding commissions increasing further.

“In response to these pressures, companies that are managing the cycle continue to reduce their retained exposure to classes of business that do not meet acceptable return hurdles, and they are expanding in classes that offer better opportunities. For the most part, 2015 is expected to produce an even more careful approach to risk selection. The orderly approach to risk selection appears to be working for global companies, and most are expected to remain cautious on the business they write.

“Given the lack of major catastrophe losses and ongoing favorable reserve development, most reinsurers continue to deliver solid combined ratios. In addition, although pricing continues to soften and terms and conditions are becoming more challenging, the U.S. and Bermuda reinsurance sector is still posting solid returns on equity [ROEs].

“Conditions in 2015 will remain competitive and challenging. Margin compression also will likely persist as third-party capital seeks a larger piece of the pie. As a result, A.M. Best is forecasting underwriting performance for the U.S. and Bermuda reinsurance sector to produce an average combined ratio of 94.8 and an average ROE of 8.2% for 2015, representing a stubbornly difficult market environment and a normal level of catastrophe activity.

“Additionally, A.M. Best, working in conjunction with Guy Carpenter, has for a second year compiled an estimate of dedicated global reinsurance capacity. This estimate is not a simple aggregation of the shareholders’ equity of all companies that write reinsurance, since some of that capacity is allocated to the insurance business or other outside interests.

“A.M. Best and Guy Carpenter have estimated the amount of capital dedicated to writing reinsurance by using A.M. Best’s proprietary capital model, Best’s Capital Adequacy Ratio [BCAR], and reviewing line-of-business allocations for the majority of the top 50 reinsurance organizations, while giving consideration to reinsurance capacity offered by smaller participants in the market.

“At year-end 2013, there was approximately USD 320 billion of traditional capital and USD 48 billion of convergence capital, including industry loss warranties, collateralized reinsurance and cat bonds.

“On this basis, A.M. Best estimated marginal growth in traditional sector capital as strong earnings again sustained share buybacks and dividends, and reinsurers sought to maintain but not expand their capital positions. Convergence capital continues to pour into the industry, and catastrophe bond issuance has continued to grow strongly. Guy Carpenter’s current estimate of convergence capital, including cat bonds, is USD 60 billion for 2014.

“As a result, total dedicated global reinsurance capacity for 2014 is estimated to be USD 394 billion.

To access the full, complimentary copy of this briefing, please visit here.

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