The global reinsurance industry has recently received a significant boost, as the esteemed rating agency AM Best revised its sector outlook from stable to positive. This shift, driven by expectations of robust profit margins and consistent underwriting discipline, marks the first time in several years that AM Best has issued a positive outlook for this sector. This change is particularly noteworthy for reinsurance companies, including those like ours that have previously received an A- rating from AM Best.

A Historical Perspective: From Negative to Positive
The Downturn: Negative Outlook in 2014

Back in August 2014, AM Best, along with other major rating agencies, adopted a negative outlook on the reinsurance sector. This period was characterized by a soft market, where intense competition and an abundance of capital led to diminished profitability for reinsurers. The outlook remained pessimistic as the industry struggled with low rates and high competition.

Stabilizing Forces: 2018’s Shift to Stable

In December 2018, AM Best revised its outlook to stable, recognizing signs of market stabilization. This was driven by more stable pricing, disciplined use of alternative capital, and a cushioning effect of excess capital following substantial losses in the preceding years. This stable outlook persisted through the recent hard market period, where the focus was on maintaining stability rather than growth.

The Present Day: A Positive Outlook for the Future
Underwriting Discipline and Profit Margins

The current positive outlook is a reflection of AM Best’s confidence in the reinsurance sector’s forward prospects. Despite a recent deceleration in the hardening of rates, the agency highlights that underwriting discipline remains strong, and profit margins are sufficiently robust to absorb higher loss activities.

AM Best emphasized that the demand for reinsurance coverage remains high due to increased natural catastrophe losses and ongoing economic uncertainties. This demand, coupled with stable or slowly reducing interest rates, is expected to support strong returns in the short term.

Favorable Market Conditions

Another key factor in the revised outlook is the improved and stabilized underwriting margins. The reinsurance market has seen a shift towards tougher terms and conditions, including more targeted named peril coverage, reduced appetite for aggregate covers, a move from proportional to excess-of-loss reinsurance, and higher attachment points. These changes have helped reinsurers reprice contracts more effectively and manage risk more efficiently.

Resilience Amidst Large Losses

Despite significant losses in the first quarter of 2024, such as the collapse of the Francis Scott Key Bridge in Baltimore, reinsurer underwriting margins and annualized returns-on-equity have remained strong. This resilience further strengthens AM Best’s positive view of the sector.

Looking Ahead: Opportunities and Challenges
Consolidation and Quality

One of the notable observations by AM Best is the lack of new entrants in the reinsurance market, which supports the current market discipline. Instead, consolidation and a flight to quality are more likely scenarios. Larger reinsurers are expanding their books, driven by higher rates and increased demand from cedents, thereby reinforcing their market positions.

Sustainable Profitability

While AM Best does not expect the exceptional returns on equity seen in 2023 to be repeated at such high levels, the focus remains on sustainable profitability through disciplined underwriting. This strategic approach is anticipated to maintain the health of profit margins even in the face of future challenges.

Implications for Reinsurance Companies
Embracing Underwriting Discipline

For reinsurance companies, including those with an A- rating like ours, the positive outlook underscores the importance of maintaining rigorous underwriting discipline. By focusing on targeted coverages, managing attachment points, and prioritizing excess-of-loss over proportional covers, we can continue to optimize our risk management strategies.

Leveraging Market Conditions

The current market conditions, with strong demand and favorable terms and conditions, provide an excellent opportunity for growth and expansion. By capitalizing on these conditions, we can strengthen our market position and enhance our profitability.

Preparing for Future Challenges

While the outlook is positive, it is essential to remain vigilant and prepared for potential challenges. This includes monitoring market trends, adapting to regulatory changes, and continuing to innovate in risk assessment and management.

All this marks a significant milestone for the industry…

The revision of AM Best’s outlook for the global reinsurance sector from stable to positive marks a significant milestone for the industry. This change reflects the sector’s resilience, improved profitability, and disciplined approach to underwriting. For reinsurance companies, this presents an opportunity to reinforce our market positions, embrace disciplined practices, and prepare for a sustainable future of growth and profitability.

As we navigate this promising landscape, our commitment to maintaining high standards of underwriting discipline and capital management will be crucial. By leveraging the current favorable conditions and staying prepared for future challenges, we can continue to thrive in this evolving market