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FOR IMMEDIATE RELEASE
OLDWICK - JANUARY 11, 2016 10:08 AM (EST)
A.M. Best expects that dedicated reinsurance capacity, which includes $68 billion of convergence capacity, will likely remain flat at an estimated $400 billion in 2015 compared with the previous year, according to a new Best’s Briefing. A.M. Best, working in conjunction with Guy Carpenter, has estimated the amount of capital dedicated to writing reinsurance by using A.M. Best’s proprietary capital model, Best’s Capital Adequacy Ratio (BCAR), and reviewing line-of-business allocations for the majority of the top 50 reinsurance organizations, while giving consideration to reinsurance capacity offered by smaller participants in the market. A.M. Best also considered the amount of financed capital (debt) employed in a company’s capital structure.
The Best’s Briefing, titled, “Abundant Capacity Fuels Evolution in Global Reinsurance,” states that the global reinsurance market remains challenging, but A.M. Best’s global reinsurance composite is still expected to post reasonable results for 2015, aided by the lack of large U.S. catastrophe losses, continued capital management strategies and favorable reserve releases, the latter of which A.M. Best sees as unsustainable over the long term. Conditions will remain competitive and challenging, as primary companies are expected to continue retaining more business and/or seek better terms and conditions for sharing their profitable business.
Convergence capital, which includes industry loss warranties, collateralized reinsurance and catastrophe bonds, continues to enter the reinsurance market, albeit at a slowing pace. Catastrophe bond issuances continued to grow strongly to $8.8 billion through year-end 2014 and tapered off to $7.6 billion in 2015. Likewise, capital continued to flow into some collateralized reinsurance vehicles and sidecars. However, traditional rated balance sheet capacity is estimated to decline marginally for 2015. This marginal decline is seen as a strategic move as reinsurance organizations appear to be reducing their appetite for underpriced reinsurance business in favor of other more attractive business opportunities.
Recent mergers and acquisitions (M&A) are reflecting the need to attain greater global scale and diversified product lines and distribution. Reinsurers understand that the ability to move in and out of certain classes of business swiftly through market cycles will lead to a stronger advantage over the competition. With current market conditions of price declines, increasing commissions, lower premiums and increased competition, the need for M&A is becoming clearer, and A.M. Best believes that consolidation will continue, particularly among smaller players in the market as acceptable returns become increasingly harder to achieve. Companies with the scale and the global footprint to put money to work or shrink a particular offering will have the real advantage going forward. A.M. Best anticipates companies with well-diversified businesses and a global reach will likely see the majority of the deals in the market.
To access a copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=245095 .
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