Reinsurers shift focus to primary business over pricing –AM Best

Structural changes in the reinsurance market could spell the end of sudden large hikes in reinsurance pricing, according to AM Best. Many reinsurers will be forced to be more cautious in their underwriting and will likely have to increase their focus on primary insurance, it adds.

AM Best believes that capital market involvement in reinsurance means that pricing is unlikely to ever reach the levels seen after Hurricane Andrew. Following a large loss, rate increases are likely to be tempered by capital market investors pouring into the market, it said.

The building pressure on pricing has seen reinsurers seek mergers and acquisitions, as well as diversification. This has seen a significant shift in reinsurers’ appetite for primary business as they seek to get closer to the source of risk.

According to AM Best, the split between reinsurance and insurance for the largest European and Bermudian reinsurers had risen to 60 percent and 40 percent in 2014 from 68 percent and 32 percent in 2004.

“As long as reinsurance pricing continues to decline in the double digits and primary pricing remains more stable, primary business segments will likely continue to grow as a percentage of total premiums for some of the more diversified players,” AM Best said.

In its Global Reinsurance report, AM Best painted a gloomy outlook for the global reinsurance market, suggesting current conditions can no longer be seen as cyclical.

Maintaining its negative ratings outlook on the sector, AM Best said that reinsurers are now operating in a ‘new reality’ of abundant capacity from traditional and alternative sources, low interest rates and thinner reinsurance margins driven by intense competition against shrinking demand for reinsurance cover.

Primary insurance companies are retaining more risk and are increasingly using alternative markets for their risk management needs, it added.

AM Best also noted the ‘phenomenal’ growth in the property catastrophe insurance-linked securities market. Catastrophe bonds, which were non-existent twenty years ago, now cover some $63.3 billion of risk, it said.

“Third party capital continues to pour into the market with no ease in sight as hedge funds, pension funds and other investors continue to look for yield and sources of diversification,” according to AM Best.

Despite some $110bn of catastrophe losses in 2011 and a $20-25bn loss from Superstorm Sandy in 2012, reinsurance pricing has continued to decline in double digits at every renewal since.

According to AM Best, the global reinsurance rate-on-line is back to levels last seen before the terrorist attacks on the World Trade Centre in 2001.