Best: Global Reinsurance Pricing Rising, but ‘Short Memory’ Can Derail Increases

NU Online News Service, Jan. 9, 12:48 p.m. EST

The global reinsurance industry seems “poised for a turn,” as multiple factors are increasing the demand for reinsurance, but the short memory of the insurance industry could cause soft-market pricing to return in a hurry as the sting of recent losses fades, according to A.M. Best.

In a Reinsurance market briefing, Oldwick, N.J.-based Best says, “Over the past five years, reinsurers generally experienced declining demand for reinsurance capacity primary companies increased retentions across the board.” Recent global catastrophes, volatility of assets, and catastrophe-model changes, though, have conspired to change primary companies' perception of risk, which has increased demand for reinsurance, Best adds.

“This increasing demand for reinsurance cover has helped to bolster current pricing for property catastrophe-related business,” says Best, noting that it expects improved pricing, terms and conditions that will support low double-digit returns on equity for reinsurers in 2012.

But the rating agency cautions that the pricing increases may be short lived. “History has proven that the market has a short memory, and if the sting of recent loss events quickly fades, the soft market may return,” Best says.

Best gives the reinsurance industry a stable outlook for now, but says if soft-market pricing does reemerge in 2012, the capital strength of the segment would slowly erode, and the rating agency would “consider revising the ratings outlook to negative, as pressure on ratings would be expected to mount.”

Reinsurers still face a number of challenges, Best says, including pricing pressures, low-investment yields and a “limited cushion of loss-reserve releases available to mask deteriorating earnings.”

But Best adds that global reinsurers are still capable of absorbing significant losses from a combination of events. Additionally, the sector has taken “decisive measures” to reduce its exposure to the Eurozone crisis.

Best also says, “the sector has repeatedly proven its resilience,” absorbing numerous catastrophic events around the world and managing them well from a capital perspective.

“The reinsurance market is at a juncture where companies seek to anticipate potential negative scenarios while positioning themselves to seize opportunities,” Best concludes. “While a different set of market conditions certainly would be preferable, the reinsurance sector has been adaptable, resilient and stable during these challenging times.”