With only modest pricing increases experienced over 2018 and momentum set to fade in 2019, the global reinsurance sector may find it increasingly difficult to keep pace with its cost of capital, according to S&P Global Ratings.
The rating agency noted that last year the reinsurance sector generated returns on capital of only 1.2%, which was 6.3 percentage points below its cost of capital and the worst level recorded in more than 13 years.
Reinsurance renewals experienced slight pricing increases over 2018 in response to last year’s natural catastrophe losses, but upward momentum is fading and it remains an open question whether pricing will keep up with costs, S&P suggested.
The firm added that it expects the combined earnings for the U.S insurance and the global reinsurance industries to be able to absorb year-to-date catastrophe losses, although they may exceed some reinsurers’ catastrophe budgets for the year.
If this year’s trends continue, year-to-date catastrophes are unlikely to prevent pricing momentum from slowing at the January 2019 renewals, although Hurricane Michael and the California wildfires may provide some support for the rate increases demanded by primary insurers.
Given the relatively high level of catastrophe losses experienced so far this year, S&P stated that return on capital in 2018 may not materially exceed reinsurers’ cost of capital.