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Jun 2020

Global reinsurance market firming, but not considered hard yet

Source: Middle East Insurance Review | Jul 2019

Reinsurers saw some green shoots during this year’s April and June renewals, with property catastrophe rate increases in the 15% to 25% range on loss-affected accounts, according to S&P Global Ratings. The change follows disappointing reinsurance pricing increases in 2018 and early 2019.
The recent underperformance of property catastrophe, in combination with lacklustre performance in other lines of business, posed a threat to the reinsurance sector’s underwriting margins, overall profitability, and ability to earn its cost of capital, forcing reinsurers’ hand to push for price increases.
“At this stage in the cycle, we characterise the current global reinsurance pricing environment as a hardening market rather than a hard one,” the credit rating agency said in a report titled ‘2019 Pricing’s Green Shoots Look Promising’.
Key takeaways from the report include:
  • Record back-to-back catastrophe years in 2017-2018 and the resulting loss creep are shaping 2019 renewals.
  • During the January 2019 reinsurance renewals, price increases were modest, while in April and June they were more pronounced, confirming the regionalisation of reinsurance pricing trends.
  • Alternative capital has become an integral part of the property catastrophe market and, despite its recent slowdown, its growth is expected to pick up once the latest bumps are smoothed over.
  • The National Oceanic and Atmospheric Administration (NOAA) predicts a 40% chance of a near-normal 2019 Atlantic hurricane season, with El Nino and a warmer-than-average Atlantic shaping this season’s intensity. The forecasts include a 30% chance of an above-normal season, and a 30% chance of a below-normal season
S&P maintains a stable outlook on the global reinsurance sector and on the majority of the reinsurers it rates, reflecting reinsurers’ still-robust capital adequacy although below historical levels due to active catastrophe years in 2017-2018, unrealised losses on fixed-income securities because of higher interest rates in the US, and fourth-quarter 2018 stock market volatility.
Thus far, strong enterprise risk management has helped reinsurers maintain relatively disciplined underwriting. S&P still believes the sector faces competitive business conditions as the influx of alternative capital, though at a slower rate, continues to challenge reinsurers’ business models.
Difficult market conditions have driven reinsurers to rethink their short- and long-term strategies. This has led many to pursue M&A, divest non-performing businesses, diversify into less-commoditised lines of business, and embrace the permanence of alternative capital.
They have also adjusted risk exposures, and are actively managing their capital structures through share buybacks and special dividends, and refinancing their maturing securities with more cost-effective ones.
Reinsurers are exploring new opportunities for growth and ways to fill the protection gap. The top reinsurers in the sector have succeeded by focusing on client relationships and recognising the need to act as both a capacity provider and a risk partner, with the ability to offer customisable solutions to clients. M 
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