Strong balance sheets and sector-wide consolidation via M&A are among the drivers for improved credit profiles of reinsurers, with Moody’s global outlook remaining stable.
Higher interest rates and an increased demand from primary insurers in 2018 have alleviated some of the long standing imbalance between supply and demand whilst improving reinsurers’ profitability.
However, despite seeing a modest rise in pricing as a result of large catastrophe-related claims in 2017, relatively weak price growth during the 2018 mid-year renewal period hints at price pressure going in to January 2019.
Moody’s considers smaller reinsurers to be under the greatest pressure to find a merger partner as firms continue to leverage M&A to scale up, diversify, and improve profitability through capital efficiencies and cost reduction.
“The reason we are seeing more M&A in the lower end of the sector is because companies are unable to compete. If you are in the $3 – $5 billion capital range you are probably seen as a potential target,” explains Moody’s.
Elsewhere, Reinsurers’ use of alternative capital as a means to enhance their competitive position is growing.
For reinsurers with strong risk-modelling capabilities and marketable underwriting skills, managing alternative capital vehicles will provide a distinct competitive advantage in the years ahead, says Moody’s.
With climate change issues becoming more prominent, Moody’s also sees opportunities for reinsurers to benefit from a growing demand for advice on climate risk-adaptation.
Furthermore, reinsurers are increasingly adopting sustainable investment policies and underwriting exclusions – as seen with many of the major players’ divestment from coal-related projects.
“We’re going to see greater demand for risk-transfer products as governments, corporations and individuals develop adaptation strategies to deal with economic risks of climate change that range from natural disasters, primarily flooding, to the protection gap issue,” says Moody’s.
