After enjoying a “miraculous” 2013, global reinsurers face significant challenges this year, A.M. Best Co. Inc. said Friday.
Relatively low-level catastrophe losses, combined with what Best said “seems an endless flow of favorable loss-reserve development from prior accident years,” helped reinsurers, the Oldwick, N.J.-based rating agency said in “Could 2013 be the Apex of the Next Few Years?”
Best cautioned that “It would be foolish, though, to gaze into the rearview mirror and lose sight of the difficult road that lies ahead, which may be far more treacherous.”
While Best maintained its “stable” rating outlook for the reinsurance sector following a “miraculous” 2013, it said that “due to the rapidly changing market environment and increased competition across a broadening array of business classes and regions, A.M. Best expects to re-evaluate this outlook after the midyear renewal season.”
Best said an increasingly competitive landscape emerged at the January renewals.
This was spurred by the unceasing flow of alternative capacity, increased retentions among primary insurers, narrowing of players on existing reinsurance programs and excess capacity among traditional reinsurers fighting to hold existing positions, Best said. While this competition was most evident in U.S. property catastrophe programs, “the overflow of capacity to other business classes and regions exerted pressure across the board,” it said.
The investment picture is also troublesome with interest rates that remain low. “The outlook for any near-term improvement appears distant without stretching for yield and taking greater asset risk,” Best said in the analysis.
The hope for reinsurers is that “the deterioration in price, terms and conditions stays within a rational level,” the rating agency said.
Best said enterprise risk management has worked well for reinsurers by allocating capacity to the most profitable opportunities and avoiding accumulation of unprofitable business. Best also said if the soft market persists or grows broader, mergers and acquisitions in the sector could pick up.
“At this stage of the market cycle, the worst scenario would be to forgo prudent enterprise risk management controls, relaxing underwriting criteria or taking an overly aggressive investment posture,” Best said. “It appears that the market is at an inflection point, and it is critical that rational heads prevail.”