Rating agency A.M. Best has upgraded its sector outlook for the global reinsurance industry from stable to positive. This change reflects expectations of strong profit margins and continued underwriting discipline.
This marks the first positive outlook for the global reinsurance market in several years. A.M. Best turned negative on the sector in August 2014, a period marked by a soft market when all major agencies shared this perspective.
In December 2018, A.M. Best revised its outlook to stable, citing more stable pricing and disciplined alternative capital. Excess capital supported reinsurance businesses despite heavy losses in the prior two years.
Larger reinsurers are expanding their books, driven by higher reinsurance rates, a flight to quality, and increased demand from cedents.
During the recent hard market period, A.M. Best maintained a stable outlook. Now, the agency expresses increased confidence in future prospects for reinsurers. It notes more favorable terms and conditions for reinsurance capital providers.
Demand for coverage remains strong due to heightened natural catastrophe loss activity and general economic uncertainty
Carlos Wong-Fupuy, senior director, A.M. Best
“We also considered the expectations of a slower reduction in interest rates than originally anticipated, which are likely to support strong returns in the short term”, Carlos Wong-Fupuy says.
Despite a slowdown in rate hardening, underwriting discipline continues, and profit margins remain robust enough to handle higher loss activity.
Improved reinsurance underwriting margins result from repriced contracts and stricter terms.
This includes more targeted named peril coverage, reduced appetite for aggregate covers, a shift from proportional to excess-of-loss, and higher attachment points.
Despite large events like the Francis Scott Key Bridge collapse in Baltimore affecting first-quarter 2024 loss ratios, A.M. Best reports that underwriting margins and annualized returns-on-equity remain strong.
A.M. Best expects no new players to disrupt market discipline and foresees continued consolidation and flight to quality.
Although exceptional returns on equity from 2023 are unlikely to recur at the same level, reinsurers will focus on maintaining underwriting discipline in the near term.
by Yana Keller
