Worry on alternative capacity prompts AM Best to keep negative outlook
While some Bermuda reinsurers may be anticipating a prolonged hard market following the heavy losses of 2017, this wish may be stymied by further alternative capacity entering the market – a worry that has prompted AM Best to maintain its 2018 outlook for the global reinsurance sector at negative.
The rating agency said that while catastrophe events in the third quarter of 2017 may slightly improve overall reinsurance market conditions in the near term, it is holding its 2018 outlook for the global reinsurance sector at negative, citing the considerable uncertainty surrounding the level and sustainability of any market improvement.
The Best’s Briefing, titled 'Market Segment Outlook: Global Reinsurance', states that the market was able to absorb the 2017 events, and that balance sheets remain solid going into the January 1, 2018, renewal season.
However, earnings going into third-quarter 2017 had already been depressed compared with historical trends because of ongoing market challenges. Combined with lackluster investment returns, this has served to drag operating and overall performance to a level just marginally sufficient to cover the average cost of capital for many reinsurance-predominate companies.
The negative impact of catastrophe losses on underwriting earnings in 2017 has further eroded the segment’s historical earnings, the report noted.
AM Best also is concerned that property-catastrophe pricing is at the mercy of the alternative capital markets and is not as heavily influenced by the traditional reinsurance market as historically has been the case, and that any near-term market improvement may be relatively short-lived given the current level of excess capacity in the overall market.
AM Best estimates a combined ratio of approximately 110 percent and a return on equity of -1 percent for the full-year 2017 for AM Best’s global reinsurance composite, and a meagre five-year average (2012-2017) return of equity of approximately 8 percent. This does not factor in the potential for further adverse loss reserve development.
The briefing also notes potential factors that could favourably impact the reinsurance market over the near term, and that may be sufficient cause for AM Best to revise the outlook to stable from negative, including an improving global economy, rising cession rates and further merger and acquisition activity.
“A potential increase in demand from government risk pools such as the National Flood Insurance Plan in the United States, as well as opportunities in cyber, mortgage and other emerging risks should allow for greater utilization of available market capacity,” said Robert DeRose, senior director, AM Best.
