AM Best revises global reinsurance industry outlook to positive ...

10 Jun 2024

9th June 2024 - Author: Steve Evans

Rating agency AM Best has revised its sector outlook for the global reinsurance industry from stable to positive, citing an expectation of robust reinsurer profit margins and saying it expects underwriting discipline will be maintained.

Outlook - Figure 1
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This is the first time AM Best’s outlook for the global reinsurance market has been positive for some years.

The rating agency first turned negative on the reinsurance sector back in August 2014, a time when all the main agencies adopted that stance in the height of the soft market.

AM Best then revised its outlook on global reinsurance to stable in December 2018, citing more stable pricing at the time, the fact alternative capital was holding its discipline on pricing, while excess capital was supporting reinsurance businesses in the wake of heavy losses in the previous two years.

Fast-forward through the recent hard market period, where the outlook was kept stable until now, and AM Best is increasingly confident on forward prospects for reinsurers, it seems.

As well as profitability, AM Best also highlights the new reality across the market of terms and conditions that are much more favourable to reinsurance capital providers.

This is despite the fact the recent hardening of rates has now decelerated, as AM Best notes that “underwriting discipline is being maintained and profit margins remain healthy enough to absorb higher loss activity than recently experienced.”

Outlook - Figure 2
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Carlos Wong-Fupuy, senior director, AM Best, explained on the newly positive sector outlook that, “Demand for coverage remains strong due to heightened natural catastrophe loss activity and general economic uncertainty.

“We also considered the expectations of a slower reduction in interest rates than originally anticipated, which are likely to support strong returns in the short term.”

Reinsurance underwriting margins have improved and stabilised the rating agency notes, thanks to efforts to reprice contracts and install tougher terms and conditions, in the form of more targeted named peril coverage, a reduction of appetite for aggregate covers, a shift away from proportional to excess-of-loss, and a sharp increase in attachment points.

The rating agency also noted that the larger reinsurers are growing, expanding their reinsurance books thanks to a combination of higher reinsurance rates, a perceived flight to quality and increased demand from cedents.

Despite the fact loss ratios were affected by large events in the first-quarter of 2024, including the collision of a ship with the Francis Scott Key Bridge in Baltimore causing its collapse, AM Best says that reinsurer underwriting margins and annualised returns-on-equity remain strong.

Further strengthening AM Best’s view on the reinsurance sector, the rating agency says there are still “no new players expected to disrupt current market discipline,” adding that in its opinion “consolidation and flight to quality are more likely.”

“AM Best believes that the exceptional returns on equity experienced in 2023 are unlikely to be repeated at such a high level, but expects reinsurers to focus on underwriting discipline in the near term,” Wong-Fupuy concluded.

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