Despite some concerns relating to the soft market environment, A.M. Best Co. said the rating firm is maintaining a stable outlook in 2008 for the global reinsurance sector.
Oldwick, N.J.-based Best pointed to the sector's solid earnings, strong balance sheets and "continued improvements in enterprise risk management (ERM)."
The result of this outlook, according to Best, is that most 2008 rating actions with respect to reinsurers will likely be affirmations with stable outlooks.
"The global reinsurance sector has benefited from two years of moderate catastrophe losses and solid operating earnings," Best said in a statement.
Capitalization of the sector and the majority of its participants, Best said "are currently healthy when just a few years back, many reinsurers were struggling to find capital."
Speaking to the health of the market in 2008, Best predicted the reinsurance sector will have a profitable year barring major catastrophe activity. The rating firm pointed to profitable technical rates and "investment income fueled by strong cash flow" as factors that will contribute to the sector's profitability.
However, Best noted that challenges associated with the continuing soft market may hurt reinsurers in 2008.
"Although the reinsurance sector's capital position is strong, recent history indicates the pain that soft casualty markets can inflict on required capital year after year, and how large-scale catastrophes can remove massive amounts of capital from the market in the blink of an eye," the firm said.
Best analysts Devin Inskeep and Robert DeRose said rates had gone up for several years during the hard market, which bolstered reinsurers' balance sheets, and so it will take time to determine the degree of softening in the current market with respect to underwriting margins.
Maintaining underwriting controls and discipline will help reinsurers negotiate the soft market conditions, but Best said that "history indicates these are not easy tasks to accomplish."
Mr. Inskeep and Mr. DeRose said Best is being told that although prices are off peak, insurers are still maintaining underwriting discipline.
Best commended reinsurers for embracing ERM practices and for their improvement of risk modeling.
But the rating agency added that reinsurers' ERM enhancements have not yet been tested by a mega-catastrophic event. "The true success of reinsurers achieving value through ERM is the ability to adhere to its role through all phases of the pricing cycle," Best said. "If this can be achieved, perhaps this soft market will not be as painful as the previous one."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.