AM Best upgrades reinsurance sector outlook to positive

The reinsurance market has a positive outlook for the first time in more than a decade, according to AM Best.

AM Best has upgraded its outlook on the global reinsurance sector from stable to positive, highlighting robust reinsurance profit margins.

Underwriting discipline is being maintained and profit margins remain healthy enough to absorb higher loss activity than recently experienced, the sector outlook noted.

It is the first time the insurance-focused credit rating agency has had a positive outlook on the market for well over a decade.

AM Best turned its outlook negative in August 2014, then improved it to stable in December 2018.

“Demand for coverage remains strong due to heightened natural catastrophe loss activity and general economic uncertainty,” said Carlos Wong-Fupuy, senior director, AM 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,” he said.

The rating agency also called insurance-linked securities (ILS) “a strategic partner” in the market’s view, with ILS investors also enjoying similarly improved market prospects.

“ILS previously was seen as a direct competitor to rated balance sheets, but is now perceived as more of a strategic partner,” AM Best said.

“This is particularly true given the ILS segment’s focus on the most remote layers, as well as retro capacity needed to support traditional reinsurers’ risk appetites.”

The rating agency suggested there will be a lack of new startup reinsurers to provide fresh competition.

“Despite the attractive returns experienced in recent periods, we do not foresee any significant new entrants to the market,” AM Best said.

Existing reinsurers are more of a draw for capital than startups, AM Best said.

“Well-respected management teams have been unable to raise capital to set up the new start-ups that we would have seen in prior hard market cycles,” the rating agency continued.

This lack of disruption by new entrants enables the preservation of discipline by seasoned players still recouping losses from previous years,” AM Best added.