A.M. Best is revising its outlook for the reinsurance sector to negative, citing the significant ongoing market challenges that will hinder the potential for positive rating outlooks and upgrades and over time may result in negative rating pressure.
A.M. Best first signaled this potential in a 4 April 2014 special report but continued to pore over the metrics for a better understanding of the market dynamics.
The agency claims that it has become apparent that, as compression continues bearing down on investment yields and underwriting margins, this strain on profitability will ultimately place a drag on financial strength.
At this point A.M. Best’s view is longer term than the typical 12-18 months.
While A.M. Best does not anticipate a significant number of negative outlooks or downgrades over the very near term, it states that the market headwinds at this point present significant longer-term challenges for the industry.
They have cited declining rates, the unsustainable flow of net favourable loss reserve development, low investment yields and the continued pressure of convergence capital.
However, A.M. Best tried to challenge that negative bias and look at a broad range of measures and other trends.
These include the traditional market’s increased use of capital markets capacity to help optimise results, net probable maximum loss (PML) for peak zones as a percentage of capital, the degree of cycle management and oscillation between primary and reinsurance platforms, the subtle migration into asset classes that will produce some increased yield and the focus on producing fee income.
In A.M. Best’s recent release, they picked out “companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope” as being better positioned to withstand the pressures in this type of operating environment.
