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Cool heads needed as reinsurers face pressure

Ratings agency AM Best expects to re-evaluate its stable outlook for global reinsurers after the mid-year renewal season, as competition increases.

There are early indications underwriting restraint may be waning as excess capital vies for the same opportunities, pressuring prices and putting a focus on terms and conditions.

“The recently concluded April renewals revealed a worse-than-expected outcome for reinsurers as the abundance of worldwide capacity weighed on negotiations,” AM Best says.

“Despite these competitive market conditions, new capital continues to enter the reinsurance market, creating additional pressure as available capacity is reallocated to a broader spectrum of business classes and regions of the world.”

An adverse response would be to forego prudent enterprise risk management by relaxing underwriting criteria or taking an overly aggressive investment approach.

“It appears the market is at an inflection point, and it is critical that rational heads prevail,” AM Best says.

The current stable outlook reflects strong levels of risk-adjusted capital, discerning risk management, historically favourable underwriting and overall performance, and a slow improvement in the economic environment, underpinned by the US.

A relatively benign level of catastrophes helped reinsurer profits last year, while investment income remained relatively healthy despite low interest rates.

Opportunities usually follow significant catastrophes when capacity is in relatively short supply, but capital has poured into the market recently, according to the report.

AM Best questions whether even a large US catastrophe would help stabilise the market.

“It seems ironic that as underwriting opportunities have waned the reinsurance sector has attracted additional capital to a market already saturated with it.”