AM Best Finds Global Reinsurers ‘Maintain Equilibrium’ Through COVID-19

Ratings agency AM Best says its continued stable outlook on the global reinsurance industry reflects negative market forces largely driven by the COVID-19 pandemic, social inflation and previous years’ property catastrophe events that are being offset by positive forces of hardening rates and a re-assessment of third-party capital investor appetite.

The negative forces, combined with an overcapitalized sector, have translated into “companies struggling to meet their cost of capital,” analysts write in Best’s Market Segment Report, “Global Reinsurers Maintain Equilibrium Through COVID-19 Turbulence.”

On the positive side, the hardening pricing conditions are creating opportunity, according to AM Best. Property catastrophe, specialty lines and some U.S. casualty lines have been showing much-needed improvement in pricing and coverage terms.

“The risk is that the positive market momentum turns out to be short-lived and excess capacity starts expanding again,” the report warns, with AM Best stressing that it believes the market hardening must last for at least the next year or two to have meaningful impact to offset the impact of prior underwriting losses, as well as the uncertain impact of COVID-19 and related legal disputes, as well as continued social inflation.

“If reinsurers do not sustain stronger pricing, they risk losing investor confidence,” the agency warns.

Some companies appear better positioned than others to adapt to these market conditions, according to AM Best.

Expectations, which vary greatly on both sides of the balance sheet, depend largely on factors such as each company’s product mix— with event cancellation, non-U.S. business interruption, directors and officers, workers’ compensation and financial lines most likely to be affected—and differing levels of concentration in equity holdings and any extant relief from hedging strategies.

Companies’ individual abilities to take advantage of the hardening market conditions are likely to be influenced by a flight to quality. While companies with a “solid financial strength, robust reputation and market position, as well as stable, consistent and transparent results,” should be best-positioned going forward, AM Best believes that the sector as a whole should be able to manage this challenging—and promising—market environment in the medium-term.

According to the report, the AM Best global reinsurance composite has produced a five-year (2015-2019) average combined ratio of 99.6% and a return on equity of 5.7%. The report notes, however, that 3-4 percentage points of that combined ratio performance is attributable to favorable loss reserve development. This benefit continues to diminish, and without prompt, corrective action, will create a drag on earnings, the report notes.

Other observations from this year’s report include:


The report discusses the negative developments associated with COVID-19. On the liability side of the balance sheet, early estimates of increases in loss ratios for the full year 2020 fluctuate from 5% on the low end to more than 20%. “This wide range is explained by each company’s product mix—event cancellation, non-US business interruption, D&O, workers compensation, and financial lines are the most likely to be affected—but also by the different assumptions and degrees of prudence embedded in these calculations,” the report says.

It adds that some of these business lines may not realize material loss activity until later in 2020 or beyond, when the effects of the economic stimulus packages are expected to have subsided, but before any litigation has been adjudicated.

On the asset side of the balance sheet, by the end of the first quarter of 2020 unrealized investment losses ranged from single-digit percentage points to almost a third of policyholder surplus. Since then, stock markets and credit spreads have significantly recovered to pre-COVID-19 levels, but AM Best said it believes that “volatility is here to stay” for the foreseeable future.

For a copy of this report visit the AM Best site here.

A short video interview on the report can be viewed here.