Financial services ratings agency Moody’s has changed its outlook on the global reinsurance sector to negative from stable.
The firm points to coronavirus-related losses and other catastrophe events in 2020 that have already depleted the annual catastrophe loss budgets of many players.
Despite stronger reinsurance pricing, low interest rates and shrinking reserve releases are expected to create a challenging operating environment for the sector over next 12 to 18 months and drag on reinsurers’ profitability.
Moody’s notes how COVID-19’s ultimate impact on the reinsurance sector is extremely difficult to estimate, creating significant uncertainty.
Although losses associated with economic shutdowns that began in March are likely to be fairly clear at this point, Moody’s says reinsurers will take additional charges in coming quarters as the impact of the pandemic continues to unfold.
On top of this linguring uncertainty is the matter of business interruption and the unresolved disputes and challenges from policyholders.
While reinsurance pricing is trending upward, Moody’s says more is needed. Reinsurance pricing has been rising since 2018, but rates need to increase further to offset volatile results.
Moody’s expects the current pricing upturn will last through 2021, and a majority of the rating agency’s primary companies are anticipating price increases of +5% or more across the board next year.
Despite gains in reinsurance pricing, social inflation is expected to pressure profit margins while the higher cost of retrocessional reinsurance will further squeeze underwriting margins as alternative capital pulls back in search of better risk-adjusted returns.
Meanwhile reinsurers are reducing cat exposure in areas such as California wildfire and Florida wind, even as pricing becomes more attractive.
As retro pricing spikes higher, Moody’s is expecting some reinsurers’ “gross to net” underwriting strategies to be tested.
And finally, climate change has been highlighted as a looming, albeit longer-term challenge.
The frequency of weather-related catastrophe events has trended higher as temperatures increase and sea levels rise.
For reinsurers, Moody’s says this creates a number of risk management challenges associated with the assessment, measurement and mitigation of catastrophe risks, and has increased the volatility of firms’ results.
