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A.M. Best Special Report: Race for global reinsurers still open, premature to discount the “hedge fund re” mode

Tuesday, September 06, 2016
Opalesque Industry Update - Declining rates, broader terms and conditions, unsustainable reserve takedowns, low investment yields and continued pressure from convergence capital are all negative factors that continue to adversely impact global reinsurance companies. These weak operating fundamentals in the reinsurance sector also are being exacerbated by continued weakened demand from primary insurers as they retain more business to leverage their own excess capacity. As a result, companies have intensified their efforts to develop new strategies in order to adapt to structural market changes, as detailed in A.M. Best’s annual special report on the global reinsurance industry.

The new Best’s Special Report, “Innovation: The Race to Remain Relevant,” notes that reinsurers have made a number of moves to position their organizations for long-term survival, and increasingly seem to be viewing capital market capacity as an opportunity as opposed to a threat. Capital market capacity has continued to be drawn to the reinsurance sector and underwriters that have the market knowledge and distribution capability to assess risk are benefiting.

“Capital market capacity is clearly pressuring the reinsurance sector to work to charge less,” said A.M. Best Vice President Robert DeRose. “With more capital in the market, the ultimate winner should be the insured client as this drives down the cost of insurance. But it is the long-term value proposition that really matters for all parties involved and that outcome is still very unclear.”

A.M. Best revised its rating outlook to negative on the sector in August 2014 and has maintained it there since, citing the ongoing market conditions that are hindering the potential for positive rating actions over time, and eventually may translate into negative rating pressures.

Other highlights from this year’s report include:

  • Among the more notable movements in A.M. Best’s highly regarded annual ranking of the Top 50 Global Reinsurance Groups was RenaissanceRe increasing six spots in the rankings to No. 20, driven by the completion of its acquisition of Platinum. Arch moved up five places to No. 22, attributable to the consolidation of Watford Re into its operations. Qatar Re surged 15 places to No. 35, due to a reported 116% increase in gross premiums written. Munich Re, Swiss Re, and Hannover Re have occupied the first, second and third spots, respectively, since 2010.
  • Alternative capacity continues to fuel strong price competition. A.M. Best currently estimates that alternative capital represents approximately USD 71 billion of capacity, roughly 20% of the total dedicated capacity of the reinsurance market.
  • Results across A.M. Best’s composite of hedge-fund-sponsored reinsurers were unfavorable, with an overall combined ratio of 111.5%, a loss ratio of 70% and an underwriting expense ratio of 41%. A.M. Best believes it is premature to discount the “hedge fund re” model, as the level of investment volatility experienced is expected and is contemplated as part of A.M. Best’s stringent start-up requirements. A.M. Best also notes that companies in its composite were not able to avail themselves of prior-year reserve takedowns that have been heavily utilized by U.S. and Bermuda reinsurers.
  • The global reinsurance report also includes A.M. Best’s analysis of the alternative capital market, along with in-depth reviews of the Lloyd’s and life reinsurance markets, as well as geographic regions such as Brazil, Asia/Pacific and Africa.

A.M. Best will present a webinar, “The State of the Global Reinsurance Market,” on Thursday, Sept. 8, 2016, starting at 10:00 a.m. EDT. A.M. Best analysts will cover recent developments in the Americas, Europe, the Middle East and Asia, as well as A.M. Best’s annual ranking of leading global reinsurers.

Joe Taussig talked about criticisms against hedge funds reinsurers in this Opalesque.TV interview:

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