A return to an underwriting profit in 2012 enabled the global reinsurance market to continue its growth trajectory despite significant challenges, according to a new report from A.M. Best.
Deteriorating investment yields seem to be the greatest immediate concern, as depressed interest rates have persisted longer than most market observers predicted. Improvement in the near future appears unlikely unless companies choose to stretch for yield, which would require taking a greater risk on the asset side, according to A.M. Best.
In the report, A.M. Best outlines how the market has responded by keeping fixed-income durations short to insulate against interest rate risk. The segment has also benefited from a run-up in market values on fixed-income holdings, associated with the previous decline in interest rates.
In an attempt to prepare for better interest rates, insurers have harvested some capital gains over the period and have increased holdings of cash and short-term investments to maintain flexibility for reinvesting, according to A.M. Best. How long the wait will be for those more favorable conditions remains the question.
In the interim, the weakened yield environment has increased pressure on underwriters to find better margin business while staying within their stated underwriting risk tolerances. This is difficult, according to A.M. Best, considering the current view that the reinsurance and broader property/casualty markets are overcapitalized. The industry as a whole has recognized that achieving a 15-percent—or even a low double-digit—return on equity is challenging when the risk-free rate is in the low single-digits. However, A.M. Best makes a point of reminding insurers that the risk-free rate is not exactly risk-free either.
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