Market conditions for global reinsurance industry improving, says Best

Hardening pricing momentum and tighter terms and conditions are the factors behind AM Best maintaining its market segment outlook on the global reinsurance industry for 2021. It also pointed to improving market discipline driven by the historically low interest rate environment and limited alternative investment opportunities, as well as a growing need for reinsurance protection. However, Best also noted uncertainty with regard to claims reserve development associated with previous years’ property catastrophe events, social inflation and, more recently, business interruption and casualty lines – related to Covid-19 – as potential negative factors. It said the Covid-19 pandemic has added more uncertainty to a segment that has experienced increased loss activity in recent years, and as a result, reinsurers’ ability to rely on favourable prior-year reserve development has been diminishing steadily. The ratings agency said: “The current market hardening likely will need to continue for at least a couple of years to have a meaningful impact on the segment. Additionally, pricing momentum will have to be sufficient to offset losses from previous years, including the impact of Covid-19 and ongoing impact from social inflation. At the same time, the improving pricing environment and market discipline, the reassessment of the role of third-party capital providers following the impact of loss creep and trapped collateral, as well as the ongoing stability in the global life reinsurance segment, are viewed as positive factors.” Best said its most recent estimate of dedicated reinsurance capital exceeds the $470bn at year-end 2020, including approximately $85bn of third-party capital, a figure that has stabilised after several years of rapid expansion. Best noted a number of capital-raising initiatives so far this year, as well as the entrance to the market of several startups expecting to benefit from the positive pricing momentum. “Whether this implies a new cycle of rapid capital expansion that dampens any price improvements within a short period remains an open question. Capital erosion is not the main driver this time (unlike previous hardening phases), in our view. On the contrary, rates are increasing despite – not because of – the lack of excess capital,” said Best. It reported that pricing in the reinsurance market has been hardening across the board, with US and Asia property the most significantly affected lines, which have been impacted by heightened loss activity in the last few years. “For a prolonged period, third-party capital inflows had been driving excess capacity and contributing to reinsurers’ struggles to meet their cost of capital. The rising frequency and claims amounts of US wind events and wildfires, and Japanese typhoons, have finally disrupted those dynamics,” it said. Best concluded that while market conditions for reinsurers are improving, there are looming concerns. “Some of these include insufficient rate adequacy for certain US casualty lines, a steady decline in favourable reserve releases, and the prolonged low interest rate environment. The collective effect of these factors should lead to additional focus on underwriting discipline; failure to react to these pressures could adversely affect the segment,” it said.

Market conditions for global reinsurance industry improving, says Best

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