AM Best will maintain its ratings on reinsurers at present, but has warned there are a number of potential factors that could result in negative reappraisals.

In a special report on reinsurance obtained by insuranceNEWS.com.au, AM Best says the industry has survived the recent catastrophes well.

“The numerous events that have occurred around the world during the past 15 months are manageable from a capital perspective,” the report says.

“In January of this year, when Best assigned the current stable outlook, global reinsurance companies were strongly capitalised and adhering to underwriting discipline.

“The shocks are earnings events, not capital events, and while balance sheets remain solid, these multiple events are adding up.”

Best is concerned that modest price increases in the property catastrophe market might be short-lived and if this is the case, that the soft market will continue.

“This is the worst of all the scenarios, one that may prompt Best to revise its outlook on the reinsurance sector from stable to negative,” it said.

“A portion of the excess capital that existed at the end of December has vanished.

“While Best expects companies to manage their remaining capital prudently, if the sector continues to underwrite at a loss, it will lead to the further destruction of capital and necessitate a negative outlook for ratings.”

The ratings agency is also concerned the Japanese government and insurers will place more risk in the global market as a result of the massive losses emanating from the recent earthquake and tsunami.

Historically the Japanese have funded this risk internally, but Best sees a situation where the government and insurers could seek external help while they rebuild their capital reserves.

“A sizable reallocation of global capacity resulting from the Japanese quake could precipitate a broad-based hard market, as capacity would quickly become precious,” the report warns.

The outcome of this and a soft reinsurance market could mean reinsurers will enter next year with a “small capital cushion” which again would lead to Best placing a negative outlook on the sector.