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Investment caution has paid off for global reinsurers: S&P Ratings

29th October 2020 - Author: Katie Baker

Rating agency, S&P global ratings has released a report that explores how investment caution has paid off for reinsurers on a global scale.

S&P Global RatingsThe rating agency explained that because reinsurers exist to take on insurance risks, it is not surprising that they are more exposed to underwriting, reserving, and catastrophe risks than to investment ones.

However, their investment risk has never been negligible, and a decade of low interest rates and tough underwriting conditions forced reinsurers to increase their appetite for investment risk.

To generate any additional return, reinsurers invested, cautiously, in riskier and more illiquid assets. The gradual shift in strategy has been successful as on average, reinsurers’ capital adequacy has remained high.

If their asset allocations remained unchanged, their investment returns would have shown an even more material decline. The economic impact of the pandemic has somewhat eroded reinsurers’ capital adequacy, but their caution has largely paid off.

Despite unfavourable movements in the financial markets and in the economy, the stress test S&P Global Ratings performed on reinsurers’ balance sheets as of the end of 2019 does not indicate change to any assessment S&P made of the sector’s overall capital adequacy.

The stress test has been designed to examine asset allocation at the Top 20 global reinsurers, as a proxy for the sector. The rating agency also looked back over the past five-to-10 years and forward for the next two-to-three years, given current and expected market conditions and reinsurers’ strategies and risk tolerances.

There is an expectation that reinsurers’ investment portfolios could be hard hit by the economic fallout from the pandemic.

The stress test is measured by range of stressed assumptions covering the main asset classes to which they are exposed, these include equities, bonds, real estate, and loans.

S&P compared the outcome of our stress tests with the year-end 2019 total adjusted capital available to determine how well the various players will weather the crisis, ultimately giving an idea of which ratings could be at risk.

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