AM Best has revised its market segment outlook for the global reinsurance industry to stable from negative for 2019, citing factors stemming from a growing alignment between traditional and third-party capital among non-life reinsurers. A more-stabilized pricing environment—albeit at levels still below long-term adequacy—a rising interest rate environment, emerging growth opportunities and ongoing stability in the global life reinsurance segment also are factors in the outlook revision.
A new Best’s Market Segment Report, titled, “Market Segment Outlook: Global Reinsurance,” states that reinsurers rated by AM Best remain well-capitalized on a risk-adjusted basis despite significant catastrophe losses. In addition, excess capital in the non-life reinsurance market has provided companies the ability to take advantage of market opportunities and offer new products, invest in innovation and pursue mergers and acquisitions (M&A). AM Best is concerned that M&A can pose risks to a combined enterprise, as it can be utilized as a veil for ailing franchises. Still, M&A, if done prudently, should help improve the efficiency of the market’s overall capacity.
Additionally, the excess capital continues to exert pressure on risk pricing and poses a drag on equity returns, but reinsurers that welcome alternative capital will thereby enhance their relevance with clients and investors and garner the ability to earn low-risk, fee-based income in the process.
The briefing outlines other factors that are driving the outlook revision, including as follows:
AM Best believes alternative third-party capital will hold the line on future return expectations following the catastrophe losses incurred in 2017 and 2018, although users of this capacity require more stringent credit governance over the level and release of collateral-backing loss payment obligations;
Capital consumption and earnings volatility caused by tail events has declined, due in part to the increased utilization of third-party capital in retro-programs and the growing alignment between traditional and third-party capital;
The rising interest rate environment could lead to alternative investment opportunities for third-party capital. Rising interest rates could cause mark-to-market losses for bond portfolios, but reinsurers could benefit from higher yields if they manage their duration profiles prudently;
A renewed emphasis on underwriting discipline driven by potential loss cost inflation, coupled with lower loss reserve redundancies;
Ongoing U.S. economic growth has led to a greater demand for reinsurance. A potential increase in demand from government risk pools, as well as opportunities such as cyber or mortgage (re)insurance, should allow for greater utilization of available market capacity. Life reinsurers are seeing growth opportunities in emerging markets and as a result of Solvency II regulations;
Life reinsurers continue to maintain defensible market positions, moderate premium growth, meaningful geographic diversification and stable earnings.