A.M. Best has upgraded its outlook for the global reinsurance market to stable from negative, citing greater market stability and the benefits that alternative capital brings to the table.

Stability remains relative, however, considering how low reinsurance pricing has gotten in recent years, as A.M. Best points out.

“This change primarily reflects a pricing environment in the global [property/casualty] reinsurance segment that has stabilized – albeit currently at levels still below long-term adequacy,” A.M. Best said in its market segment report detailing its outlook change.

As rates have stabilized, A.M. Best pointed out that P/C insurance catastrophe pricing continues to be driven “by the availability of alternative third-party capital and is not as heavily influenced by the traditional reinsurance companies” as it once was.

This is a key thing to consider when looking at market dynamics, A.M. Best said, because alternative capital is often more efficient to use because of lower costs involved. Traditional capacity is more linked to alternative capital these days due to things like joint ventures, retrocession and direct ownership. Because of this, return objectives for the market should be more closely aligned in the future, according to the report.

In terms of property/casualty insurance, A.M. Best said that reinsurance pricing seems to have reached the bottom of the cycle for the foreseeable future.

Here’s a list of factors A.M. Best said have informed its outlook upgrade, including:

  • A belief that alternative third-party capital will keep the market stable, based on its use for catastrophe losses in 2017 and 2018.
  • The use of less capital and a decline in earnings volatility caused by tail events. This can be attributed to greater use of third-party capital in retro programs and the increased alignment of traditional and third-party capital.
  • Rising interest rates in the U.S. and elsewhere. A.M. Best said that this could help produce alternative investment opportunities for third-party capital. While bond portfolios could see losses, reinsurers that have managed their investment prudently could see higher investment incomes.
  • A focus once again on underwriting discipline driven by potential loss cost inflation. Lower loss reserve redundancies will also help, A.M. best said.

A.M. Best said that M&A, new risk transfer opportunities, greater use of reinsurance by cedents and ongoing U.S. economic growth also led to its outlook upgrade.

A.M. Best’s full report is “Market Segment Outlook: Global Reinsurance.”

Source: A.M. Best