Strong 2006 earnings leading to increased competition, A.M. Best says

Most global reinsurers are anticipating strong 2006 earnings thanks in part to a benign 2006 catastrophe season, A.M. Best has said in a published comment on the January 2007 renewal season.Global insurers are also taking advantage of an attractive pricing environment following hurricanes Katrina, Rita and Wilma in 2005, A.M. Best reported. However, these developments are leading to increased competition in the market with ample capacity widely available, A.M. Best commented. In addition, improving capitalization and earnings are allowing primary insurers to retain more risks –a trend that was already noted at the January 2006 renewals and one that is exacerbating the situation.In A.M. Best’s view, global reinsurers have continued to instill underwriting discipline and have reduced their exposure to lines of business they regard as inadequately priced.In the retrocession market, capacity remains scarce partially as result of the withdrawal of GE Insurance Solutions from this segment following the merger with Swiss Re, A.M. Best observed. Reinsurers have been seeking alternative sources of capacity, such as sidecars or catastrophe bonds; however, they have not (yet) fully replaced the exited capacity. A.M. Best said the recent winter storm in Europe, with an insured market loss of between EUR5-7 billion (US$ 6.6-9.1 billion), is a timely reminder of the volatile nature of non-life reinsurance. Although pricing levels remain favourable overall, the increasing risks from more frequent natural catastrophes should not be ignored. A.M. Best believes that overall risk management capabilities of reinsurers are becoming even more important in this changing landscape.A.M. Best said it expects that given the state of the reinsurance market, earnings in 2007 are likely to remain favourable, provided that natural catastrophes risk are adequately managed.The ratings agency further predicted that new capacity, in the form of Bermuda startups and sidecars, will become an increasing source of competition in Europe given the recent events in Florida, which is expected to free up an additional US$2-4 billion in capacity.