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Secular headwinds to continue for reinsurers, but rates may rise 5% in 2020

3rd September 2019 - Author: Steve Evans

Reinsurance firms are expected to continue facing “secular headwinds” to their business models in 2020, with rate rises of around 5% expected at renewals next year, but these may not be sufficient to offset the continued competitive trends faced.

S&P Global RatingsThis is according to rating agency S&P Global Ratings, who said this morning that the coming year will continue to be a challenging one for much of the reinsurance sector.

The rating agency does maintain its stable outlook for the sector though, as well as for the majority of reinsurers it rates, citing “still-robust capital adequacy and relatively disciplined underwriting,” as well as “well-developed enterprise risk management, and an overall improving reinsurance pricing environment.”

However, the fundamental secular competitive trends persist, S&P says, even following recent back-to-back record catastrophe loss years in 2017 and 2018.

S&P expects the positive pricing momentum stimulated by the losses and ongoing loss creep to persist into 2020.

Speaking this morning at a media briefing in London, S&P representatives expressed an opinion that reinsurance rates could rise by as much as 5% in 2020.

Positive news for the sector, but perhaps not positive enough to fend off the challenges faced by a secular adjustment to their business models, competitive threats and the excess capital that weighs on the market.

“Reinsurers are battling the commoditization of their business and the rise of alternative capital nibbling at their margins,” explained S&P Global Ratings credit analyst Taoufik Gharib.

S&P believes that reinsurers could “take a page from the playbook of other disrupted industries to stay relevant and become more innovative.”

Which is much more easily said than done, especially in an industry with hundreds of years of legacy such as reinsurance.

S&P asks a series of questions:

– Are reinsurers complacent in their centuries-old industry and stuck in their old ways of doing business?
– Do reinsurance prices react only to natural catastrophe insured losses and adverse reserve developments?
– Are reinsurers sitting on their hands awaiting external forces of change or are they self-critical enough to initiate change from within?

The rating agency suggests that these are some of the key issues reinsurers need to address over the next few years, as they attempt to reinvent themselves and create sustainable business models for the future.

While the pricing environment and expectation of further rate rises into 2020 give reinsurers some breathing room, the underlying secular factors remain intact, S&P says.

There is no scarcity of capital, either traditional or alternative from ILS market sources, S&P notes.

In addition, the commoditisation of the reinsurance product set is expected to continue advancing, especially within property catastrophe risks.

While the centralisation of reinsurance buying and optimisation of strategies is expected to continue as well.

Broker consolidation is expected to entrench intermediaries, S&P says, while global P&C markets remain fragmented despite M&A.

Growth opportunities are, as a result, expected to be relatively limited, while competition in reinsurance is expected to remain high.

“These factors will continue to push the sector to evolve,” S&P concludes, however it believes it will be some time before the competitive landscape changes.

“For now, reinsurers are optimistic about the pricing environment, but a long road to ensure continued relevance lies ahead,” S&P commented.

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