The reason, according to its latest briefing: major market challenges “that will hinder the potential for positive rating actions over time and may eventually translate into negative rating pressures.”
“As compression continues bearing down on investment yields and underwriting margins, the strain on profitability will ultimately place a drag on risk-adjusted returns and financial strength,” A.M. Best said in its briefing, “Reinsurance Outlook Maintained at Negative—Redundant Reserves, Benign Catastrophes Mask Reality.”
Other factors that will hammer the reinsurance sector and adversely affect risk-adjusted returns include declining rates, broader terms and conditions, unsustainable flow of net favorable loss reserve development, low investment yields, and continued pressure from convergence capital, the report noted.
As well, low interest rates will continue to hurt, A.M. Best said.
A.M. Best asserted that these already weak fundamentals will be made worse by continued weakening demand from primary insurers “as they retain more business to leverage their own excess capacity.”
At the same time, A.M. Best said it sees some signs of hope. The ratings entity noted some positive developments for insurers and reinsurers in the market, plus regulatory changes in the European Union and China that could provide some business opportunities for reinsurers over time.
“But it is too early to gauge any potential benefits,” A.M. Best said.
Also, A.M. Best said that reinsurers that are diversified and sophisticated about distribution and geography will do well—even in a tough market.
“The companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better positioned to withstand the pressures in this type of operating environment and have greater ability to target profitable opportunities as they arise,” A.M. Best said.
Source: A.M. Best