An A.M. Best analysis of the global reinsurance industry under the rating agency’s updated Best’s Credit Rating Methodology (BCRM) and its new building block approach revealed that approximately two-thirds of the rated population have the strongest category of balance sheet strength, and that no companies in the entire population fell below the strong category.
The Best’s Special Report, titled “Global Reinsurers – Building Block Approach Confirms the Strength of the Market, Despite Challenging Conditions,” states that these results reflect a number of these companies have material exposure to low frequency/high severity events, such as the 2017 Atlantic hurricane season, and as a result, maintain significant surplus. On Oct. 13, 2017, the new BCRM was implemented, and as a result of the new building block approach, fewer than 5% of A.M. Best’s ratings were placed under review.
Although A.M. Best maintains a negative ratings outlook for the global reinsurance industry, the industry on an aggregate basis remains strongly capitalized, owing largely to reinsurers’ surplus growth, which stems from generating positive cash flows and loss reserve redundancies, managing high quality investment portfolios and maintaining appropriate reinsurance structures to protect surplus. The primary quantitative tool used to evaluate balance sheet strength is Best’s Capital Adequacy Ratio, which helps determine whether a company’s capitalization is appropriate; however, A.M. Best takes all of the balance sheet components into consideration, as the BCAR itself is not the sole determinant of the balance sheet strength assessment.
Along with balance sheet strength, the key pillars A.M. Best uses in its credit analysis are operating performance, business profile and enterprise risk management. According to the report, half of the rated population recorded an adequate assessment of operating performance, meaning there was no change to the baseline rating assessment. This adequate assessment level reflects a median five-year average combined ratio for U.S. property/casualty companies of 89.3%.
Among A.M. Best’s rated global reinsurers, half have either a favorable or very favorable market profile. Key characteristics of a company with a favorable business profile assessment include a leading market position, diversified operations in key markets that have high-to-moderate barriers to entry and a strong management team that uses data effectively. In addition, a far majority of reinsurers were found to have appropriate or better enterprise risk management (ERM) frameworks in place that are in line with the size and complexity of each company’s operations, with less than 5% employing a marginal ERM framework.
“The analysis of the global reinsurance market using the building-block approach accentuates the value of the approach in that is based on the convergence of multiple analytical assessments that result in a published rating,” said Steven M. Chirico, a director in A.M. Best’s property/casualty ratings division. “This generalized assessment of rating factors appears reasonable and in line with expectations of the global reinsurers that balance stockholder expectations while maintaining the long-term financial strength important to policyholders.”
A.M. Best executives will present the findings of this report, along with an update on the state of the global reinsurance industry, on Wednesday, Oct. 25, 2017, at an insurance market briefing, to be held at the Hamilton Princess & Beach Club in Hamilton, Bermuda. To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=267321 .
Source: A.M. Best.