A.M. Best is holding its 2016 outlook for the global reinsurance sector at negative, citing the significant ongoing market challenges that will hinder the potential for positive rating actions over time and may eventually translate into negative rating pressures.
The Best’s Briefing, titled, “Reinsurance Outlook Maintained at Negative—Redundant Reserves, Benign Catastrophes Mask Reality,” notes that as compression continues bearing down on investment yields and underwriting margins, the strain on profitability will ultimately place a drag on risk-adjusted returns and financial strength.
Declining rates, broader terms and conditions, unsustainable flow of net favorable loss reserve development, low investment yields and continued pressure from convergence capital are all negative factors that will adversely impact risk-adjusted returns over the longer term. Interest rates remain extraordinarily low, despite the recent action taken by the U.S. Federal Reserve. These weak operating fundamentals are being exacerbated by continued weakening demand from primary insurers as they retain more business to leverage their own excess capacity. While a broader cyber (re)insurance solution in the market and pending regulatory changes in the European Union and China may over time provide some new business opportunities for reinsurers, it is too early to gauge any potential benefits.
A.M. Best’s view remains longer term than the typical 12-18 months. The market headwinds at this point present significant longer-term challenges that industry players need to work through. The companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better positioned to withstand the pressures in this type of operating environment and have greater ability to target profitable opportunities as they arise.
For the full copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=244706.
Source: A.M. Best Company