Capacity increasing despite low yield and competition, says AM Best

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A return to an underwriting profit in 2012 enabled the global reinsurance market to continue its growth trajectory despite significant challenges, according to a report from AM Best.

Deterioration in investment yields seems to be the greatest immediate concern, as depressed interest rates have persisted longer than most market observers predicted. Near-term improvement appears unlikely, unless companies take greater risk on the asset side.

The market has responded principally by keeping fixed-income durations short to insulate against interest rate risk and what appears to be an inevitable decline in market values.

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, considering the current view that the reinsurance and broader property/casualty markets are overcapitalised.

The industry as a whole has recognised that achieving a 15% or even a low double-digit return on equity is challenging when the risk-free rate is in the low single digits. But read the fine print: the risk free rate is not exactly risk-free either.