OLDWICK, N.J.--(BUSINESS WIRE)--Despite the combined persistence of pricing declines, increased commissions and tougher terms and conditions, the reinsurance industry generated solid results in 2014 with strong combined ratios and profitable returns, according to a new special report from A.M. Best.
The competitive landscape shows no signs of fading, particularly for U.S. property catastrophe programs. Reinsurance pricing for the Jan. 1, 2015, renewals was down between 5%-15%, depending on risk and loss experience, continuing the decline from 2014.
The Best’s Special Report, titled “Appearances Can Be Deceiving,” also notes that the low interest rate environment continues to be a drag on earnings, thus increasing the need for better underwriting returns. This has led some reinsurers to move toward riskier assets in search of yield, while underwriting profitability has benefited from another year of record low catastrophe losses.
The reported calendar-year combined ratio of 89.5% for 2014 reflects the continued favorable loss reserve development that amounted to 5.3 points, compared with 5.7 points in 2013 and 6.1 points in 2012. The global reinsurance sector has benefited from USD 56 billion in favorable reserve development since 2007. A.M. Best believes that the benefit from this favorable development will decline going forward because the older accident years have given as much as possible and more recent accident years are leaner in terms of potential redundancy. Continued pressure from alternative capital entering the market is yet another factor that will adversely affect risk-adjusted returns over the longer term.
The report also notes that the recent increase in merger and acquisition activity within the reinsurance industry is likely a function of a market environment that is only expected to become more challenging as 2015 progresses. A.M. Best believes that the need for global, experienced, strong and well-diversified reinsurers will continue to drive the M&A wave in the medium term.
A.M. Best is forecasting the underwriting performance to produce an average combined ratio of 94.8% in 2015 and an average return on equity of 8.2%, representing the current difficult market environment and a normal level of catastrophe activity.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=235444.
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