The global reinsurance industry is operating on rough seas amid declining rates, broader terms and conditions, unsustainable reserve takedowns, low investment yields and continued pressure from convergence capital, according to a special report by insurance ratings agency A.M. Best.
The report, entitled “Down But Not Out: Reinsurers Look to Reposition Amid Market Disruption,” outlines that the reinsurance sector had an average accident-year combined ratio of 101.0 and return on equity of 8.2% for 2016, with continued deterioration since 2013. The accident-year underwriting loss is the first in over a decade, with the exception of 2011 which had several major global catastrophes.
Despite the challenging conditions, the report noted bright spots in the cyber and mortgage reinsurance sectors, along with reinsurers responding to market conditions by decreasing their net probable maximum loss (PML) for peak zones, seizing new opportunities and geographies, generating fee income, and gradually migrating into asset classes that will produce increased investment yield.
However, A.M. Best warned that an above-average catastrophe year could be devastating to the industry.
“If the reinsurance market is booking the accident year combined ratio at a loss in a relatively benign catastrophe year, and that in and of itself is not the impetus for change, the next logical question is: ‘What will it take to turn the market?’” asked Robert DeRose, senior director at A.M. Best. “At this point, it does not appear that the lack of underwriting profit in the current book or continued erosion in return on equity will break the cycle.”
The ratings agency has placed a negative outlook on the global reinsurance sector since August 2014. It has cited market conditions which may hinder opportunities for positive rating actions, which eventually may become negative rating pressures.
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