2017 is expected to be an “inflection point” for the challenging U.S. property/casualty (P/C) sector as claims increase and pricing and reserves diminish further, causing reinsurers to adapt to the “softer for longer” environment, says Standard & Poor’s (S&P).
The international ratings agency recently provided an update on the U.S. insurance and reinsurance industry, underlining the continued strong capitalisation of insurers and reinsurers against persistent rate declines and weak operating conditions.
Despite a slowdown at the recent 1/1 2017 renewals, pricing in the global reinsurance market continues to decline in response to the benign loss environment, ample capacity from traditional and alternative reinsurance sources and the resulting intense competition.
S&P feels that reinsurance companies are adapting to the “softer for longer” landscape, and while rate reduction deceleration is expected to continue in the coming months, S&P described business conditions in the reinsurance sector as “weak,” which suggests that “competitive positions and earnings are under pressure.”
The rating agency has maintained its stable outlook for the global reinsurance sector, and highlights record, strong capital adequacy levels supported by solid earnings over the past few years. It’s a valid observation, but it’s important to remember that many reinsurers’ impressive results in more recent years have been aided by a lack of large loss events and strong reserve releases, the latter of which S&P expects to diminish further in 2017.
This suggests that reinsurers will have even less room to navigate the testing market landscape, and should a substantial loss event take place some players might find themselves in a very difficult position, unable to call on reserves to mitigate the impact and support/improve returns.
S&P also maintains a stable outlook for the primary P/C space, again highlighting strong capitalisation, which has in part been aided by the availability of an abundance of efficient reinsurance capacity. However, S&P warns that increased claims and falling reserves and pricing suggests the marketplace will reach an “inflection point” in the year ahead, which is expected to result in underwriting losses.
“Nevertheless, we don’t anticipate a “softer for longer” rate cycle for the U.S. P/C sector,” says S&P.
The international financial services rating agency also expects merger and acquisition (M&A) activity in the global reinsurance industry to persist, and expects small to medium-sized specialty insurers and reinsurers to be the main targets.
So while S&P expects the “softer for longer” operating environment to persist in the global reinsurance industry, primary P/C insurers are expected to experience a more favourable rate cycle despite the expectation that combined ratios will exceed the 100% threshold.
Reserves continue to decline for both insurers and reinsurers and with interest rates remaining low all parts of the risk transfer value chain are struggling to make up for lost underwriting profits on the investment side of the balance sheet.
So it appears that S&P expects times to remain challenging for global insurers and reinsurers and, with a “softer for longer” operating landscape predicted for reinsurers it will be interesting to see how firms attempt to navigate further rate declines, particularly should catastrophe losses rise and reserves continue to diminish, as expected.
