Stability in reinsurance sector challenged by soft market: A.M. Best

The onset of the soft market will challenge reinsurers to maintain the stability shown in strong results over the past two years, according to a new report by A.M. Best.2003 was a strong year for reinsurers in the U.S., Europe and particularly Bermuda, with the top 15 Bermuda reinsurers posting a combined ratio of 89.3% on average. However, signs of weakness can be seen in all of these markets. In the U.S. property rates began to drop last year, although casualty rates maintained steam into 2004 renewals. In Europe, reinsurers have basked under low catastrophe losses in 2003 and early 2004, along with rate hardening and investment gains, but the challenge will be to maintain price discipline as the soft market creeps forward. A.M. Best is concerned by the growing exposure of Bermuda reinsurers to casualty business. All reinsurers will be challenged to manage capital effectively through the cycle, a particularly difficult task in the current environment where the industry is not laden with excess capital, and shareholder expectations for return on capital are high. “The reinsurance sector’s risk-adjusted capital base has been partially restored after stabilisation in the capital markets and raising of some new capital. A.M. Best sees a rapid change in the sector’s capital structure, with increasing reliance on “soft” capital lowering the overall quality.”Nonetheless, the rater’s overall perspective on the sector is positive, with the outlook on financial strength ratings generally stable.