A new report from insurance rating source A.M. Best finds thatthe global reinsurance market booked its second loss in 10 years in2016; the other occurred in 2011.

The Best’s Special Report, “Down But Not Out: Reinsurers Look to RepositionAmid Market Disruption,” finds that the current market “appearsto be operating amid malaise” and ended 2016 with an accidentcombined ratio of 101.0.

Related: Insurers rally from Florida to Europe as Irma fearsabate

While some may say this is a conservative loss, the reality isthat since 2013, the sector’s combined ratios have continued toweaken, leading A.M. Best to change its outlook for the insurancesector to negative as far back as the summer of 2014. The reportdescribes the return on equity for the last three years as“anemic,” ending at 8% in 2016, or approximately five percentagepoints lower than 2013, with a dedicated reinsurance capacity at anestimated $420 billion.

The report also says that some of the loss was masked byinterest in mortgage reinsurance as well as an increase in lossreserve development. However, the company finds that an aboveaverage catastrophe year, as seems to be the case with bothHurricane Harvey and Hurricane Irma, could be viewed as“exceedingly damaging” for reinsurers.

“If the reinsurance market is booking the accident year combinedratio at a loss in a relatively benign catastrophe year, and thatin and of itself is not the impetus for change, the next logicalquestion is: What will it take to turn the market?” asked RobertDeRose, A.M. Best senior director in a press release. “At thispoint, it does not appear that the lack of underwriting profit inthe current book or continued erosion in return on equity willbreak the cycle.”

When the company questioned why third-party capital wouldcontinue to enter the already declining reinsurance market, theyfound that “property catastrophe reinsurance is viewed as anon-correlating asset class to a broadly diversified investmentportfolio for many pension plans.”

From a ratings perspective, A.M. Best says it will continue tohave a negative outlook for the reinsurance sector, which willprobably not change given the exposures from the latest hurricanes,although Florida is already known to be at a higher risk forcatastrophic storms.

Top reinsurers

The report also identified the top 50 reinsurers as measured by thereinsurance gross premiums written (GPW). The top 10 reinsurers are:

1. Swiss Re Ltd.
2. Munich Reinsurance Company.
3. Hannover Ruck S.E.
4. SCOR S.E.
5. Berkshire Hathaway Inc.
6. Lloyd’s.
7. Reinsurance Group of America Inc.
8. China Reinsurance (Group) Corporation.
9. Great West Lifeco.
10. Korean Reinsurance Company.

Combined, Swiss Re and Munich Re represent more than 30% of theGPW and these 10 companies comprise $156 billion or a little under70% of the total GPW, meaning much of risk is held by thesefirms.

Water rises in a neighborhood after Hurricane Irma broughtfloodwaters to Jacksonville, Fla., Monday, Sept. 11, 2017. (APPhoto/John Raoux)

The hurricane impact

A.M. Best assembled a panel of rating and insurance-linkedsecurities (ILS) experts to evaluate the market and why investorsstill value it despite the weakness in growth. One of the questionsaddressed the impact of a major event on the market.

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Aditya Dutt of RenaissanceRe shared that, “At a very simplelevel, you have an expected loss. Let’s call it a very big one.Pick Florida because everyone thinks they know about Florida. A bigloss occurs in Florida. It’s a well-modeled region of the world. Wethink what prevails is the capital provider. The capital provideris comfortable putting in more capital." However, Dutt said thatreinsurers will be less likely to rush into a peril or region ofthe world that is unknown or unmodeled.

Frank Majors of Nephila Capital believes that capital can flowinto risk much more efficiently than it did 10 to 15 years ago. Hesays from an underwriting perspective, when investors have moretime to ask questions and conduct research on a specific risk, themore willing they are to reinvest following a negative event.

'It is going to be interesting'

He said, “It is going to be interesting. It will be just like pastevents when some reinsurers failed and some thrived. You’re goingto see some ILS funds fail and you’re going to see some thrive.There is enough experience to show that alternative investors arejust as rational as other forms of investors.”

Majors explained that for investors who have a 2% to 10%allocation to an asset class and suffer a loss, the impact overallon their fund would not be substantial. “It’s not going to hurtthem if they’ve got a 5% allocation and it’s down 20%. That’s down1% on their fund. They can take a long view on that.”

Risk modeler AIR estimates insured losses from Hurricane Irmawill be between $20 billion and $65 billion for the U.S. andCaribbean. Data analytics firm CoreLogic estimates that more than3.4 million residential and commercial properties in Florida wereat risk for hurricane-driven storm surge, but did not providefigures on possible damage from inland flooding.

The fact that Hurricane Irma continues to be downgraded as itmoves north and that it traveled significantly faster thanHurricane Harvey could help mitigate some of the damage sustainedacross the Florida and neighboring states, and by the insurers andreinsurers in those areas.