According to the annual Global reinsurance highlights publication from ratings agency Standard & Poor’s (S&P), tough competition could put ratings under pressure
S&P’s annual publication Global reinsurance highlights will focus on the competitive pressures that the agency believes will obstruct insurers from generating strong returns, and on the challenges the sector faces as it works to ‘reinforce its relevance to existing and future clients as the global economy continues to evolve’. In the run-up to the publication’s release, S&P offered an article analysing part of the overall picture, specifically how ongoing pressures and challenges will affect the process by which it rates reinsurers.
“In our view,” said the agency, “increased competition has caused premiums to decline. An influx of third-party capital is fuelling excess capacity in the industry, exacerbating the problem. The knock-on effects could threaten reinsurers’ competitive positions and their ability to maintain their financial strength. We also see heightened potential for volatility in earnings because of weakened pricing.” Despite this, however, global reinsurers are, S&P said, being pro-active about mitigating the effect that increased competition is likely to have on business, and the agency went on to say that ‘in general, we have not yet seen material signs that they have succumbed to the temptation to use inadequate pricing to retain market share’. Instead, reinsurers are apparently seeking markets with more profit potential, or altering investment strategies to cope with riskier assets and consequently increase investment returns.
“Some of the stronger, more diversified reinsurers are slightly reducing their exposure to property catastrophe business where prices have fallen materially,” added S&P. “Smaller firms are teaming up and forming consortia to gain scale. That said, ratings on reinsurers remain sensitive to changes in our assessment of their business risk profile and risk position.”
Of the 23 global reinsurers rated by S&P, many ‘share at least strong capital adequacy, strong competitive positions, and strong enterprise risk management capabilities’, according to the agency. “These industry strengths have contributed to the stability of our ratings on global reinsurers over the past few years. The average [financial strength rating] for the 23 … that we rate remains strong, at ‘A’.”
Many smaller players in the global reinsurance market have utilised consortia in order to shield their competitive positions, combining forces so that they can maintain a relatively level playing field with larger primary insurers. S&P expects that for as long as the current pressure on premium rates persists, mergers and acquisitions will remain high on companies’ agendas, as a consequences of limited growth opportunities and the requirement to observe economies of scale.
“Although our ratings on 20 of the 23 global reinsurers have a stable outlook,” said the agency, “continuing competitive pressure, reduced earnings potential, and increased industry risk in some segments of the market could cause more outlooks to turn negative. While reinsurers’ capital cushions may be robust enough to withstand the strain in the near term, ratings could migrate downward over time if we revise the subscores that underpin individual ratings downward. In response to this threat, global reinsurers are reducing their exposure to certain underwriting risks and withdrawing from markets where prices are unsustainable.”
S&P’s Global reinsurance highlights is set to appear in September, to coincide with the 2014 Reinsurance Rendez-Vous in Monte Carlo.