Reinsurers ‘living off the past’ with reserve development, says AM Best

Reserve development has played a role in masking underlying negative trends within non-life reinsurance, according to AM Best executives.

The composite combined ratio for 2016 for the non-life reinsurance sector was marked at 101% by the ratings agency during their AM Best RVS Reinsurance Market Briefing.

AM Best director Greg Reisner highlighted that this had been partially masked by favourable reserve development. He flagged that while it sat at 101%, it was 95% that was reported.

He said: “This speaks to the favourable reserve development masking the deterioration taking place in the market. But the 101% caught out attention and it’s concerning to us. Fortunately, when we looked at half-year 2017 we saw that number coming back.”

To drive the point home, a graph was shown to the audience with the five-year average ROE at 10.9% against the ROE of the same period with the loss reserve development excluded – this figure sat at 6.8%.

AM Best senior director Robert DeRose, who was also on the panel, said: “For me the most meaningful number on this graph is in the composite line at 6.8, which is really what the ROE is, stripping out favourable reserve development. They really aren’t covering the cost of capital.”

Reisner added: “There’s about a 4 point drop of that comes in terms of how the favourable reserve development has been adding to ROE, or masking what’s really taking place. With the industry earning about 6-7% over a 5-year period, it’s quite weak quite frankly. You really can’t call it anything else. They are living off the past and it’s not as visible until you start stripping away numbers.”