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Drying up of reserve releases to offset pricing pressures

While there may be downward pressure on rates courtesy of the strong recovery in the reinsurance industry's balance sheet, an offsetting force of dwindling reserve releases is likely to continue gaining momentum.

As the graphic below demonstrates, ratings agency AM Best expects the favourable impact of prior-year reserve development in the US P&C industry - which underlies the reinsurance sector and can be viewed as a bellwether - to continue to ease off.

Consequently, by the end of next year, reserve releases may have a near-zero impact on combined ratios.

The view was echoed by its rival Fitch, which noted that while 2012 is expected to be the seventh consecutive year of overall favourable development for reinsurer reserves, 2013 is expected to benefit far less from such releases than recent years.

"Furthermore, in several cases, reinsurers have reported reserve deficiencies in certain product lines, particularly longer-tail ones, such as casualty reinsurance.

"While such adverse developments are not outside normal expectations for the current pricing environment, given the cyclical nature of reinsurance underwriting, Fitch is increasingly concerned about the potential for large reserve hits at the end of a soft market that could move the industry to a more material deficient reserve position," the agency said.

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