The reinsurance sector has been broadly characterized as being overcapitalized. The US and Bermuda market, a significant regional hub within this sector, also has been labeled with this generality. However, this market’s strength goes much deeper. It is true that risk-adjusted capital is strong, but the focus on prudent underwriting and pricing fundamentals has led to this achievement. Executive management teams have held the line, expecting to be paid adequately for the risks they take.
Prudent reserving also remains a strength of the market. Many (re)insurance companies have been able to take advantage of redundant reserves and augment earnings through a period of diminishing underwriting and investment opportunities, according to a special report by the A.M. Best Co.
Investment allocations have shifted as (re)insurers try to offset a prolonged low interest rate environment. Traditional (re)insurance companies are conservative by nature, allocating their investments with a large percentage in fixed-income investments. This strategy remains intact. However, there are subtle shifts in investment allocations, with precautionary migration toward alternative investments, hedge funds and equities as (re)insurers continue searching for adequate returns. This remains a challenge as investment yields appear likely to linger at historical lows for the next few years.
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