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Member, Beacon International Group, Ltd.
Overcapacity poses a growing threat to the financial wellness of the worldwide reinsurance sector, rating agency A.M. Best Co. Inc. said Friday.
In a research note, Oldwick, N.J.-based Best said the additional capacity plus an estimated $190 billion in insured losses due to catastrophes worldwide over the past 2½ years have put new pressure on the sector.
“The challenge of managing loss accumulation from global catastrophes was evident in 2011, and since 2008 reinsurers have faced numerous hurdles due to a weakened global economy: deteriorating investment returns; more volatile investments; suppressed growth opportunities; increased client retentions and competitive pricing,” Best said in the research note. “Now another hurdle has materialized on the horizon in the form of third-party capital.”
The new capacity, emanating from pensions and hedge funds in the form of insurance-linked securities, is adding pressure on an already competitive market, Best said.
“While the capital markets historically have provided capacity out on the tail for property/catastrophe risk, generally in the form of catastrophe bonds, industry loss warranties and other collateralized structures, it now appears investors, asset managers and bankers are showing more interest in the lower layers of catastrophe programs, as well as in other specialty and casualty classes.”