AM Best gives reinsurance a negative outlook

AM Best has revised its outlook for the financial strength of the reinsurance sector to negative, citing significant ongoing challenges that could cause rates to fall further.

The ratings agency said pressure on underwriting margins and lower investment returns would strain profitability and “ultimately place a drag on financial strength”.

AM Best said it did not anticipate a significant number of negative outlooks or downgrades on individual reinsurers over the very near term.

But it said: “The market headwinds at this point present significant longer term challenges for the industry.”

The ratings agency said: “Broadly speaking, rated balance sheets are currently well capitalised and capable of withstanding various stress scenarios.

“However, over time this strength may erode as earnings come under increased pressure and grow more volatile, favourable reserve development wanes and the ability to earn back losses following events is prolonged by the instantaneous inflow of alternative capacity.

“All of these issues reflect increased concern that underwriting discipline, which until recently had been a hallmark for the reinsurance sector, is beginning to diminish as companies look to protect market share at the expense of profitability.”

AM Best said optimal conditions were required to produce returns that would have been considered mediocre just a few years ago.

According to reinsurance broker Guy Carpenter, global reinsurance catastrophe rates fell by 11% at 1 January renewals.