Analysts at S&P Global expect underwriting margins to improve in 2022, which “would add resiliency to the sector”. Yet mark-to-market investment losses could weaken reinsurers’ ratings positions.
In addition, as retrocession use holds steady, despite higher rates, analysts think that reinsurers aiming to further derisk in 2023 will need to find the right balance of gross exposure and use of retrocession.
According to the S&P Global Markets report, the rising underwriting margins could provide “some cushion” against sizable insured industry losses. Mainly due to increases in pre-tax profit (including the catastrophe budget) for most reinsurers, which were based on their average share of market losses over the past five years.
S&P analysts warned that reinsurers with higher risk appetites and subdued returns would likely see lower pre-tax profits quicker than peers.
Analysts said: “Capital levels and risk appetite for individual reinsurers do vary. We expect 15 reinsurers to sustain their S&P Global Ratings capital adequacy, if aggregate losses are at the 1-in-50-year level in 2022.
“That said, such a scenario could lead six reinsurers to experience a deterioration in their S&P Global Ratings capital adequacy, unless they take action to manage their capital levels.”
In the report S&P highlighted that they have not reflected in their metrics any mark-to-market investment losses for reinsurers’ fixed-income portfolios following the rapid rise in interest rates in 2022, especially in the US.
Analysts noted: “Although these losses could be for the most part temporary, they may take three to five years to mature and unwind, depending on the duration of the assets.
“During that time, we would adjust our view of capital adequacy depending on changes in asset-liability mismatch positions and the speed at which fixed-income instruments may be reinvested at higher yields, among other factors.”
Regarding retrocession, including the use of third-party capital, analysts said it has remained a flexible and key strategic way to manage tail risk.
“Data at January 1, 2022, suggest that reinsurers have largely maintained their use of retrocession since 2021,” said analysts. “Nonetheless, rates in the retrocession market continue to increase. This means reinsurers may have to cede proportionally less of the risk if it becomes too expensive.”
They added: “As of January 1, 2022, reinsurers ceded about slightly above half of their 1-in-250 exposure, on a simple average basis. That said, average utilisation rates mask a wide range of coverage. Large global reinsurers typically retrocede less risk, for example.”
