The global reinsurance market remains challenging, although A.M. Best’s global reinsurance composite is still expected to post reasonable results for 2015, according to the rating agency.
The reasonable results will be aided by the lack of large US catastrophe losses, continued capital management strategies, and favourable reserve releases, which are unsustainable over the long-term.
Conditions will remain competitive and challenging, as primary companies are expected to continue retaining more business and/or seek better terms and conditions for sharing their profitable business.
Margin compressions will likely continue, according to A.M. Best, but there is evidence that the pace of deterioration in rates, particularly in high layer US property catastrophe, has begun to slow.
Third-party capital continues to seek a larger segment, but the speed of capital market capacity entering the market seems to have slowed compared to the previous year. In addition, some collaterised markets have held capacity flat, unable to find suitable opportunities. This is a healthy response to the current market environment, according to A.M. Best.
For 2015, A.M. Best and Guy Carpenter estimated that dedicated reinsurance capacity, which includes $68 billion of convergence capacity, will likely remain flat at $400 billion compared to 2014.
Convergence capital, collaterised reinsurance and cat bonds continued to enter the reinsurance market, although at a slowing pace. Cat bond issuance continued to grow strongly through year-end 2014 and lowered slightly in 2015.
Capital continued to flow into some collaterised reinsurance vehicles and sidecars, according to the report, however, traditional rated balance sheet capacity is estimated to decline marginally for 2015.
This marginal decline is seen as a strategic move as reinsurance organisations appear to be reducing their appetite for under-priced reinsurance business in favour of other more attractive business opportunities, A.M. Best has found.
Looking forward, A.M. Best said the reality for the reinsurance market will reflect an industry where returns are less impressive and underwriting will have to become a larger contributor to profits and returns, leading to a more cautious risk selection, more diversification of product offerings, a wider geographic reach and conservative loss picks.
A combination of this situation and the ability to take advantage of the new ‘cheaper’ capital coming into the market from investors that do not have the reinsurance and underwriting expertise could actually lead to significant success for some, although not everyone will be a winner, according to A.M. Best.
Solid players will be the ones that have been conservative in underwriting and reserving, will have been able to develop a book a business that will remain relevant for the market and that will allow for quick shifts in and out of lines of business depending on market conditions.
They must also be able to manage third-party capital to their own advantage and be capable of participating in the new era of consolidation.
