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Weak operating fundamentals keep reinsurance sector outlook negative - A.M. Best

Source: Asia Insurance Review | Feb 2015

A.M. Best is maintaining its outlook for the reinsurance sector as negative, citing the significant, ongoing market challenges that will hinder the potential for positive rating actions over time and may translate into negative rating pressures. 
 
The rating company said that as compression continues bearing down on investment yields and underwriting margins, this strain on profitability ultimately will place a drag on financial strength. At this point, its view is longer term than the typical 12 to 18 months. While A.M. Best does not anticipate a significant number of negative outlooks or downgrades over the very near term, the market’s struggles at this point present significant longer term challenges for the industry. 
 
A.M. Best added that declining rates, broader terms and conditions, an unsustainable flow of net favourable loss reserve development, low investment yields and continued pressure from convergence capital are all negative factors that will adversely impact risk-adjusted returns over the longer term. 
 
January 2015 renewal saw continued price reductions
This report came on the heels of news that “reinsurance pricing fell at the 1 January 2015 renewals in many segments, affecting almost all lines of business and geographies, continuing recent renewal trends,” according to Guy Carpenter’s 2015 global renewals report, Shaping the Future: Positive Results, Excess Capital and Diversification.
 
The reported named the “lack of costly catastrophes that resulted in global insured losses for 2014 of approximately US$30 billion, the lowest total in four years and 25% percent lower than 2013” as well as the influx of third party capital such as pension funds and hedge funds as factors driving the lower reinsurance pricing. 
 
Likewise, Willis Re reported that “after three years of relentless rate reductions, the 1 January 2015 renewal season has not offered reinsurers any respite.” It said: “Yet again, buyers have held sway, driving prices down along with improved terms and conditions. Another below average year for large losses has flattered reinsurers’ results and helped drive increases in their retained capital.”
 
Companies need diversity, better capabilities and scope to withstand pressures
A.M. Best said it believes companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better positioned to withstand the pressures in this type of operating environment and have greater ability to target profitable opportunities as they arise.
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