Higher prices and tighter policy terms, supported by favourable risk/return dynamics and healthy investment income support Moody’s Ratings’ positive outlook for the global reinsurance sector, says the credit ratings agency.
Property reinsurers raised the loss thresholds where reinsurance cover is triggered, and reduced their exposure to high-frequency, low-to-medium severity Nat CAT such as severe convective storms.
Limited new capital entering the market, keeping competitive pressure in check, will drive continued strong profitability over the next year, assuming no large catastrophes. Capital inflows have been limited and focused on catastrophe bonds, with little impact on broader pricing.
Moody’s Ratings expects property reinsurance pricing to remain favourable. Prices for casualty reinsurance also rose, although reinsurers faced rising casualty claims fuelled in part by increased litigation in the US.
Reinsurance prices remain high and policy terms and conditions are tight, helped by an upward reassessment of risk that supports good risk/return dynamics, said the report. Lower exposure to high-frequency catastrophe events has reduced earnings drag, improving reinsurers’ ability to absorb large losses when they occur.
The report said that claims trends for long-tail US casualty exposures have been unfavourable, reflecting increased litigation and higher jury awards. Reinsurers are likely to add to their reserves to counteract this. While casualty prices are rising, the improvement has been counterbalanced by higher claims, leaving profitability largely flat.
Extreme weather remains a risk but could support prices, said the ratings agency. Reinsurers have retained or increased their exposure to major catastrophe events such as Atlantic hurricanes, attracted by favourable pricing. Reinsurers’ current strong profitability supports their ability to absorb large hurricane losses. Severe catastrophe losses would also support reinsurance prices.
Generally, balance sheets are in good shape as reinsurers are mostly well-capitalised and have only moderate asset risk, limiting their exposure to financial market volatility. Higher interest rates have boosted their economic capital, and Moody’s expects it to remain healthy even as rates decline. Reinsurers use alternative capital instruments to reduce tail risk. Since these instruments are focused on peak zone hurricanes, a severe hurricane could constrain their capacity to underwrite such risks. M