A.M. Best said its outlook for the reinsurance sector remains negative due to a multitude of factors, and it will likely stay that way for quite some time.

“Our rating outlook remains longer-term than our typical 12-18 months,” A.M. Best said in its annual review of the global reinsurance sector. “The market headwinds present significant longer-term challenges that the industry players need to work through.”

What’s more, A.M. Best warns that companies don’t proactively try to address these conditions and develop a better survival plan likely won’t last.

“The companies that are not proactive will not lead their own destiny,” the ratings agency warns in its report. “It is likely that several franchises that exist today will be sporting the logo of another brand by the time this soft market has run its full course.”

A.M. Best noted that there are a number of negative factors in the market including “extraordinarily low” interest rates, declining insurance rates, broader turns and conditions, unsustainable flow of net favorable loss reserve development, low investment yields, and continued pressure from convergence capital.”

There are more problems. Brexit, the vote that will pull Great Britain from the European Union, will likely delay relief from “extraordinarily low” interest rates that span the globe. Making things worse: less demand from primary insurers as they keep more business to leverage their own excess capacity, A.M. Best said.

A.M. Best even finds trouble in the idea that there are signs of a market bottoming. A.M. Best acknowledges this, but notes that the overriding trend “remains negative, which is concerning.”

Reinsurers have been responding to the continued market challenges a number of ways, A.M. Best said. They include:

• Using greater capital market capacity to help optimize results and reduce net probably maximum loss for peak zones as a percentage of capital.

• An embrace of new opportunities and geographies.

• Production of fee income.

• A migration into asset classes that will produce some higher investment yield.

• More market consolidation.

• More M&A, in order to gain more scale and diversification.

A.M. Best noted that reinsurers do have strengths right now, such as well-capitalized rated balance sheet that can handle different stress scenarios. But the ratings agency warns that this could become diminished as carrier earnings face higher pressure, “favorable reserve development wanes, earnings grow more volatile and the ability to earn back losses following events is prolonged by the instantaneous inflow of alternative capacity.”

How can things get better? A.M. Best said it would take “benign or near-benign” catastrophe years, continued net favorable loss reserve development and stable financial markets, among other optimal conditions, to give the industry “even low double-digit returns.”

In the end, A.M. Best said that the profitable reinsurer of today, and the future, will have “diverse business portfolios, advanced distribution capabilities, and broad geographic scope.”

The full A.M. Best report is called: “Innovation: The Race to Remain Relevant.”

Source: A.M. Best