Capacity overshadows reinsurance market: AM Best

The decision to hold its stable outlook was said to reflect strong levels of capital, judicious enterprise risk management practices and a slow improvement in the US economy, the world’s largest insurance market. If the global economy stabilises, AM Best expects reasonable organic growth in reinsurers’ capital for 2013, supported by profits and new opportunities in primary insurance and specialty reinsurance operations. However, the ratings agency remains concerned that reinsurance pricing, terms and conditions may come under increasing pressure as excess capacity continues to build.hideIn recent years reinsurers have had to contend with some $190bn in insured losses. They have also had to deal with the effects of the global economy, including deteriorating investment returns, more volatile investments, suppressed growth opportunities and increased client retentions, AM Best said. Now third-party capital has emerged as another hurdle for reinsurers, the ratings agency said in its annual Global Reinsurance Report. Excess capacity already means that pricing is very competitive, but the increasing involvement in the market by capital market investors is now being felt. Specialist investors, asset managers and bankers—which are thought to have supplied $45bn of additional capacity in recent years—are now showing more interest in the lower layers of catastrophe programmes, as well as in other specialty and casualty classes. “The bad news is that more capacity only makes reinsurance pricing more competitive, especially when demand for cover is declining,” AM Best said in its report. Unlike the January and April renewal periods, June and July gave way to the pressure of excess capacity and stagnant demand, AM Best said. US property catastrophe pricing is reported to be down as much as 20%. However, the ratings agency questions the ‘stickiness’ of new third party capacity. “The traditional market has long prided itself on enduring, deep client relationships. Should this additional source of capacity decide to exit quickly, the underwriter might have some explaining to do! Reinsurers have seriously contemplated this reputational risk and should continue to do so,” it said. Despite pressure on pricing, reinsurers have enjoyed fairly good results in the first half of 2013. According to ratings agency Fitch, reinsurers experienced solid underwriting profits in the first half, due mostly to manageable catastrophe losses and sustained favourable loss reserve development. The non-life global reinsurers tracked by Fitch posted an improved underwriting combined ratio of 85.9% in the first half of 2013 compared with 87.7% in the same period of 2012. However, underwriting profitability was offset by increased unrealised investment losses on fixed maturities. As a result, shareholders’ equity grew just 1.3%. Non-life premiums also only grew modestly, Fitch said. Life reinsurance premiums increased 8.7%, but pre-tax income generated by life reinsurance declined by 17.8% as some reinsurers suffered lower investment returns and adverse performance of group risk business in the Australian market. Fitch also noted that reinsurers continue to benefit from positive developments of prior-year reserves, but this industry boon is declining—to 6.4% of earned premiums in the first half of 2013 from 6.6% at the year-end 2012. Fitch expects that favourable reserve development from prior years will be far less ‘supportive’ of underwriting results in the future, adding pressure to profitability.

Capacity overshadows reinsurance market: AM Best

Want to read this article?

Read Next

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Berkshire Hathaway discloses minority $6.72bn stake in Chubb

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Berkshire Hathaway discloses minority $6.72bn stake in Chubb

Want to read this article?

Read Next

Strebel to replace Gonzalez as head of Swiss Re China

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Premium increases continue to slow down in US commercial P&C market

Berkshire Hathaway discloses minority $6.72bn stake in Chubb

Related Articles