Market Overview

Best's Market Segment Report: Pricing Optimism Fizzles, Proving False Start for Global Reinsurance Industry


Optimism over a turn in the global reinsurance market after the 2017
catastrophes quickly diminished as the January 1 and midyear renewals
proved disappointing, providing minimal pricing increases to reinsurers
and leaving market dynamics relatively unchanged, according to a new A.M.

The new Best's Market Segment Report, "Global Reinsurance:
Optimism Fizzles, It's Back to the ‘New Normal,'" states that the
reinsurance sector continues to skip along the bottom of the market with
no clear trigger for a meaningful and widespread rate hardening. At the
same time, the capital markets' influence on the reinsurance sector
continues to expand, replacing capacity lost in 2017 and then some, with
an estimated $96 billion in convergence capital in 2018, compared with
$87 billion in 2017.

The reinsurance sector remains attractive to investors; however, returns
for traditional reinsurers have been dismal. After normalizing for
favorable reserve development, the global reinsurance composite posted a
five-year average return on equity of 4.5% at year-end 2017, compared
with a five-year average ROE of 6.8% at year-end 2016. A.M. Best is
estimating a combined ratio of 94.8% and a return on equity of
approximately 8% for full-year 2018, assuming a normal level of
catastrophes. A.M. Best also is maintaining its negative outlook on the
reinsurance market segment.

"Property catastrophe pricing is somewhat at the mercy of the
alternative capital market and is not as heavily influenced by the
traditional reinsurance market as historically has been the case," said
Robert DeRose, senior director. "This is an important distinction with
respect to current market dynamics. Any hope for near-term improvement
in the market is directly correlated to the current level of excess
capacity in the overall market today, which is being compounded by the
continued inflow of alternative capacity."

Although reinsurance pricing did not develop as anticipated, terms and
conditions did stabilize, yet remain below expectations for producing a
reasonable risk-adjusted return relative to the average cost of capital
for most reinsurers. Improvement in interest rates should have a
positive impact on the bottom line, but the momentum will emerge
gradually as a flattening yield curve is deflating the effects of a
rising federal funds rate in the United States.

"Much uncertainty remains at this point and the existing risks to the
market remain in play—as do one-off risks such as the potential fallout
from Brexit and a global trade war and what these may mean to the global
economy," said Scott Mangan, associate director.

In 2014, A.M. Best and other market observers began to question the
relevance of the underwriting cycle in a market environment coined as
the new normal. Today, the new normal for reinsurers appears to be one
with returns that are less impressive and underwriting and fee income
becoming a larger contributor to profits. A.M. Best believes the solid
market players will be ones that have been conservative in underwriting
and in reserving; have been able to develop a book of business that
remains relevant and allows for quick shifts in and out of lines of
business depending on market conditions; and have created expertise in
managing third-party capital to their own advantage.

Other highlights from this year's report include:

  • The most notable movement in A.M. Best's highly regarded annual
    ranking of the Top 50 Global Reinsurance Groups was Munich Reinsurance
    Company reclaiming the top spot as world's largest reinsurer, as
    measured by reinsurance gross premium written. Munich Re has claimed
    the top spot every year since 2010, with the exception of 2017, when
    Swiss Re topped the list. Most other movements in the rankings were
    due to ongoing mergers and acquisitions, most notably Sompo Holdings,
    Inc., which jumped to No. 22 from No. 46 after having consolidated
    Endurance Specialty Holdings Ltd. into its financial reporting. This
    report also breaks out two sub-rankings of top non-life and life
    global reinsurers.
  • In the wake of U.S. tax reform, many Bermuda-domiciled reinsurers have
    decreased the size of the inter-company reinsurance arrangements, or
    eliminated them altogether; moved capital to on-shore balance sheets;
    formed new Bermuda entities that elect to be a U.S. taxpayer; and
    restructured their treaties from a quota share to excess of loss or
    stop-loss policies.
  • The global reinsurance report also explores the state of the
    insurance-linked securities market following the 2017 catastrophes,
    along with in-depth reviews of the Lloyd's and life reinsurance
    markets, as well as geographic regions such as Asia/Pacific and Africa.

To access a copy of this market segment report, please visit

A.M. Best will present a webinar, "The Road to Convergence: Global
Reinsurance and the ILS Market," on Thursday, Sept. 6, 2018, at 10 a.m.
EDT, on reinsurance industry trends. Register at no charge at

To view a short video interview with A.M. Best Senior Director Robert
DeRose and Associate Director Scott Mangan, please click here

A.M. Best also will host its annual Reinsurance Market Briefing at the
2018 Rendez-Vous de Septembre (Rendez-Vous) on Sunday, Sept. 9, 2018, at
the Hermitage Hotel in Monte Carlo, Monaco. The briefing will

start at 10:15 a.m. and conclude at 11:45 a.m. (CEST). To register
online, please click the following link:

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