Reinsurance Market Stabilizing But Competition Still Intense

The bottom of the reinsurance market may be in sight, because brokers are having greater difficulty filling out underpriced programs and further concessions in terms are difficult to obtain, says a report by A.M. Best.

“While current market conditions appear to be stabilizing, competition remains intense and quality of earnings under pressure,” according to A.M. Best’s briefing, “Restraint in a Challenging Market Environment.”

Despite these pressures, A.M. Best says its global reinsurance composite still illustrates reasonable results for 2016, “aided by the lack of large U.S. cat[astrope] losses, ongoing capital management strategies and continued overall favorable reserve releases.”

Sector Overcapitalized

The global reinsurance sector remains overcapitalized, the report says. Dedicated reinsurance capacity, which includes $75 billion of convergence capacity, will likely increase slightly in 2016 to $420 billion, the report says, quoting statistics compiled by A.M. Best and Guy Carpenter.

While convergence capital, or third-party capital, continues to seek a “larger piece of the pie, the speed of capital market capacity entering the market seems to have slowed compared to prior years, and some collateralized markets have held capacity flat, unable to find suitable opportunities.”

This is a healthy response to market conditions. As evidence of soft market realities, the report points to the fact that cat bond issuance tapered off in 2015 and 2016, after strong growth in 2014.

Nevertheless, A.M. Best says growth of rated balance sheet capacity is expected to continue in 2017, barring any extraordinary catastrophe losses.

Capacity increases are the result of earnings outpacing share buybacks and dividends, and are viewed as “a strategic move as reinsurance organizations appear to be positioning themselves for future opportunities,” the report says. “There is some speculation that attractive business opportunities may be on the horizon in the U.S. as government policy changes emerge from the new Trump administration.”

Reinsurers: Risk Gatekeepers

“Traditional reinsurers are adapting to become the gatekeepers of insurance risk and manage the risk share and alignment with alternative capital for property and non-property classes of business,” A.M. Best says, noting this trend is expected to continue.

“There is a clear sense for the need to form larger, global, well-diversified operations with broad underwriting capabilities to assess risk and to serve as transformers of risk to the capital markets,” Best says.

Reinsurance companies believe they can better serve insurance companies by matching risk with the most appropriate form of capital.

“[A]s all market players look to become more efficient, be it through disintermediation or going directly to sources of risk, this tug of war will result in fewer hands in the pot — ultimately making it better for the purchaser of protection but likely at the expense of some franchises that exist today.”

Strategic Survival Moves

Intense competition and earnings pressures are sustaining the need for further mergers and acquisitions, especially among smaller players “as acceptable returns become increasingly harder to achieve,” the report says.

Such market realities are fueling reinsurers’ need to innovate and search for niche businesses or strategies, which are difficult to replicate.

“Over the past few years, reinsurers have made a number of strategic moves to position their organizations for long-term survival,” the report says. “M&A activity is by far the most significant of these, but we have also seen formations of joint ventures, increased research and development to find ways to close the insurance gap, use of big data in underwriting, and entry into new data-rich classes of business.”

Topics Reinsurance AM Best Market