The global reinsurance market continues to be challenged, A.M. Best Co. Inc. said in a briefing Friday, but the ratings agency’s composite overview for the sector still indicates reasonable results for 2016.

Oldwick, New Jersey-based Best attributed the results to smaller U.S. catastrophe losses, ongoing capital management strategies and continued overall reserve releases. 

“The new reality for the reinsurance market will reflect an industry where returns are less impressive and underwriting will have to become a larger contributor to profits and returns, leading to a more cautious risk selection, more diversification of product offerings, a wider geographic reach, and conservative loss picks,” the briefing said. 

Best said that some observers believe that the sector may be approaching the bottom of the soft market, as brokers are having greater difficulty filling out underpriced programs and demands for further concessions in terms diminish.

However, the briefing added, “current accident year underwriting margins will remain pressured for the near term, as rates remain at historical lows.”

Third-party capital continues to seek a larger piece of the pie, the briefing said, but the speed of capital market capacity entering the market appears to have slowed compared with prior years, and some collateralized markets have held capacity flat, unable to find suitable opportunities.

“In A.M. Best’s opinion,” the briefing said, “this is a healthy response to the current market environment.”

The briefing said that traditional reinsurers are adapting to become the gatekeepers of insurance risk and manage the risk share and alignment with alternative capital for property and nonproperty classes of business, a trend that is expected to continue. 

Best said there is a clear sense for the need to form larger, global, well-diversified operations with broad underwriting capabilities to assess risk and to transform risk to the capital markets. 

“Reinsurance companies are making the argument that they can best serve insurance companies in terms of matching risk with the most appropriate form of capital,” the briefing said. “Although, as all market players look to become more efficient, be it through disintermediation or going directly to sources of risk, this tug of war will result in fewer hands in the pot — ultimately making it better for the purchaser of protection but likely at the expense of some franchises that exist today.”