Reinsurance Price Hikes May Be Short-Lived as Capacity Is Abundant

While overall market conditions may improve over the near term as a result of catastrophe events in the third quarter of 2017, A.M. Best continues to hold a negative outlook for the global reinsurance sector in 2018.

In a new report titled “Market Segment Outlook: Global Reinsurance,” A.M. Best explained, there is considerable uncertainty surrounding the level and sustainability of any market improvement.

“[P]roperty catastrophe pricing is somewhat at the mercy of the alternative capital market and is not as heavily influenced by the traditional reinsurance market” as has been the case historically,” said A.M. Best, noting that any near-term improvement may be relatively short-lived given the amount of excess capacity in the market.

The report acknowledged that the market was able to absorb the 2017 events and reinsurance balance sheets remain solid going into the Jan. 1, 2018, renewal season.

“However, earnings going into third-quarter 2017 had already been depressed compared with historical trends because of ongoing market challenges that suppressed current accident year underwriting performance…,” said the report.

Combined with lackluster investment returns, this “has served to drag operating and overall performance to a level just marginally sufficient to cover the average cost of capital for many reinsurance-predominate companies,” it continued.

The negative impact of catastrophe losses on underwriting earnings in 2017 has further eroded the segment’s historical earnings.

A.M. Best estimates a combined ratio of approximately 110 percent and a return on equity (ROE) of -1 percent for the full year 2017 for the global reinsurance composite.

The ratings agency sees a need “for a sustained improvement in market conditions, and the events of 2017 should serve as a catalyst for that improvement.”

Source: A.M. Best