S&P Global Ratings has maintained its stable outlook on the global reinsurance sector and on the majority of the reinsurers it rates due to robust capital adequacy and disciplined underwriting, but has warned that the sector continues to face weak business conditions and fundamental challenges.
The firm noted that operating conditions remain difficult for global reinsurance despite modest 2018 renewal rate increases, and said that if the industry’s return on capital declines sustainably below its costs the market’s growth prospects will suffer and it may reassess its view of the sector.
Ongoing challenges have included a prolonged soft reinsurance pricing cycle, heightened competition, limited organic growth opportunities, a record influx of alternative capital, low interest rates, mergers and acquisitions (M&A), and large catastrophe losses.
Nevertheless, S&P said that global reinsurers have weathered these conditions convincingly so far, recording just a relatively small net loss even after 2017’s $138 billion of global insured losses, although it noted that catastrophe losses wiped out earnings for a number of reinsurers and became a capital event for others.
S&P claimed the sector’s resilience reflects the diversification benefits from writing other non-catastrophe exposed lines of business, such as casualty and primary insurance, as well as life reinsurance, and demonstrates its sound enterprise risk management (ERM) capabilities.
Reinsurers have also adapted both their short- and long-term strategies in light of weak market conditions, with many now pursuing M&A, divesting nonperforming business, diversifying into less-commoditised lines of business, and embracing third-party capital.
Additionally, companies have adjusted risk exposures while shifting their underwriting appetite to primary and proportional reinsurance, actively managing their capital structures through share buybacks and special dividends, and refinancing their maturing securities with more cost effective ones, S&P said.
While these tactical moves might help in the short-term, they do not constitute a lasting solution, and S&P believes that reinsurers will need to undergo transformational changes to survive over time.
The rating agency added that it is also observing greater differentiation among reinsurance players – a trend that it expects to accelerate going forward – and suggested that if the sector can coalesce around some of the larger players, it could regain its balance.
