Excess capacity threatening stability in reinsurance market

AM Best, one of the world’s best rating agencies, though have stable outlook for global reinsurance market, is worried about increasing pressure on reinsurance prices from excess capacity in the market from pension and hedge funds.

The decision to hold its stable outlook was said to reflect strong levels of capital, judicious enterprise risk management practices and a slow improvement in the US economy, the world’s largest insurance market. If the global economy stabilises, AM Best expects reasonable organic growth in reinsurers’ capital for 2013, supported by profits and new opportunities in primary insurance and specialty reinsurance operations.

However, the ratings agency remains concerned that reinsurance pricing, terms and conditions may come under increasing pressure as excess capacity continues to build. In recent years reinsurers have had to contend with some $190 billion in insured losses. They have also had to deal with the effects of the global economy, including deteriorating investment returns, more volatile investments, suppressed growth opportunities and increased client retentions, AM Best said.

Now third-party capital has emerged as another hurdle for reinsurers, the ratings agency said in its annual Global Reinsurance Report. Excess capacity already means that pricing is very competitive, but the increasing involvement in the market by capital market investors is now being felt.

Specialist investors, asset managers and bankers—which are thought to have supplied $45b billion of additional capacity in recent years—are now showing more interest in the lower layers of catastrophe programmes, as well as in other specialty and casualty classes.

“The bad news is that more capacity only makes reinsurance pricing more competitive, especially when demand for cover is declining,” AM Best said in its report.