A.M. Best continues to hold its outlook for the reinsurance sector at "negative", suggesting the ongoing market challenges “hinder” the potential for positive ratings action.
In a special report, the rating agency explained that risk-adjusted returns are strained, as compression continues bearing down on underwriting margins, and investment yields offer little help.
It explained that declining rates, broader terms and conditions, an unsustainable flow of net favourable loss reserve development, low investment yields, and continued pressure from convergence capital are all negative factors that will adversely affect risk-adjusted returns over the longer term.
The report suggested that adding to the uncertainty is the potential fallout from Brexit, and changes, if any, to US taxes.
A.M. Best also noted that market headwinds at this point present “significant longer-term challenges that industry players need to work through”, but, the end product over time will “likely be better and less expensive for the ultimate consumer”.
However, the report warned that arriving at the end point would be “destructive for some”.
A.M. Best said: “Our view of strong companies remains the same as it has for a number of years. Companies with diverse business portfolios, advanced distribution capabilities, and broad geographic scope are better-positioned to withstand the pressures in this type of operating environment and will be better able to target profitable opportunities as they arise.”
