SEPTEMBER 04, 2018 07:24 AM (EDT)
Best’s Market Segment Report: Pricing Optimism Fizzles, Proving False Start for Global Reinsurance Industry
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FOR IMMEDIATE RELEASE
OLDWICK - SEPTEMBER 04, 2018 07:24 AM (EDT)
Optimism over a turn in the global reinsurance market after the 2017 catastrophes quickly diminished as the January 1 and midyear renewals proved disappointing, providing minimal pricing increases to reinsurers and leaving market dynamics relatively unchanged, according to a new A.M. Best report.
The new Best’s Market Segment Report, “Global Reinsurance: Optimism Fizzles, It’s Back to the ‘New Normal,’” states that the reinsurance sector continues to skip along the bottom of the market with no clear trigger for a meaningful and widespread rate hardening. At the same time, the capital markets’ influence on the reinsurance sector continues to expand, replacing capacity lost in 2017 and then some, with an estimated $96 billion in convergence capital in 2018, compared with $87 billion in 2017.
The reinsurance sector remains attractive to investors; however, returns for traditional reinsurers have been dismal. After normalizing for favorable reserve development, the global reinsurance composite posted a five-year average return on equity of 4.5% at year-end 2017, compared with a five-year average ROE of 6.8% at year-end 2016. A.M. Best is estimating a combined ratio of 94.8% and a return on equity of approximately 8% for full-year 2018, assuming a normal level of catastrophes. A.M. Best also is maintaining its negative outlook on the reinsurance market segment.
“Property catastrophe pricing is somewhat at the mercy of the alternative capital market and is not as heavily influenced by the traditional reinsurance market as historically has been the case,” said Robert DeRose, senior director. “This is an important distinction with respect to current market dynamics. Any hope for near-term improvement in the market is directly correlated to the current level of excess capacity in the overall market today, which is being compounded by the continued inflow of alternative capacity.”
Although reinsurance pricing did not develop as anticipated, terms and conditions did stabilize, yet remain below expectations for producing a reasonable risk-adjusted return relative to the average cost of capital for most reinsurers. Improvement in interest rates should have a positive impact on the bottom line, but the momentum will emerge gradually as a flattening yield curve is deflating the effects of a rising federal funds rate in the United States.
“Much uncertainty remains at this point and the existing risks to the market remain in play—as do one-off risks such as the potential fallout from Brexit and a global trade war and what these may mean to the global economy,” said Scott Mangan, associate director.
In 2014, A.M. Best and other market observers began to question the relevance of the underwriting cycle in a market environment coined as the new normal. Today, the new normal for reinsurers appears to be one with returns that are less impressive and underwriting and fee income becoming a larger contributor to profits. A.M. Best believes the solid market players will be ones that have been conservative in underwriting and in reserving; have been able to develop a book of business that remains relevant and allows for quick shifts in and out of lines of business depending on market conditions; and have created expertise in managing third-party capital to their own advantage.
Other highlights from this year’s report include:
To access a copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=277679 .
A.M. Best will present a webinar, “The Road to Convergence: Global Reinsurance and the ILS Market,” on Thursday, Sept. 6, 2018, at 10 a.m. EDT, on reinsurance industry trends. Register at no charge at www.ambest.com/webinars/global18 .
To view a short video interview with A.M. Best Senior Director Robert DeRose and Associate Director Scott Mangan, please click here http://www.ambest.com/v.asp?v=globalre918 .
A.M. Best also will host its annual Reinsurance Market Briefing at the 2018 Rendez-Vous de Septembre (Rendez-Vous) on Sunday, Sept. 9, 2018, at the Hermitage Hotel in Monte Carlo, Monaco. The briefing will start at 10:15 a.m. and conclude at 11:45 a.m. (CEST). To register online, please click the following link: www.ambest.com/conferences/rmbseptembre2018 .
A.M. Best is a global rating agency and information provider with a unique focus on the insurance industry.