Reinsurers Will Continue to Struggle Despite Rate Rises – S&P

Ratings firm Standard & Poor’s has warned that the negative outlook it placed on the global reinsurance industry will remain until such time as pricing is at a level to protect capital.

The firm has issued a number of new reports on the current and future state of the reinsurance sector warning that underwriters will fail to deliver the cost of capital this year as COVID and catastrophes take their toll.

“Once again, the sector will not earn its cost of capital this year, bearing in mind it has struggled in the past three years to do so due to large natural catastrophe losses, adverse loss trends in certain U.S. casualty lines, and fierce competition among reinsurers exacerbated by alternative capital,” it stated in its report. “Therefore, on 18 May 2020, we revised our outlook on the global reinsurance sector to negative from stable, as we believe business conditions are difficult. Our negative outlook is an overall indicator of credit trends over the next 12 months including distribution of outlooks on ratings, existing sector wide risks, and emerging risks.

“Therefore, our negative outlook indicates that we expect to take additional negative rating actions on reinsurers over the next 12 months.”

S&P said as of 31 August, 17% of ratings on the top 40 reinsurers carry a negative outlook.

“In his 2007 book, ‘The Black Swan,’ Nassim Nicholas Taleb coined the term ‘a black swan event’ for an unpredictable catastrophic event,” added the firm. “Whether the pandemic is a black swan event or not, in the first six months of 2020, the top 20 global reinsurers reported COVID-19 losses of about $12 billion, which are an earnings event for the industry on a stand-alone basis.

“Combined with other insurance losses, notably natural catastrophes and capital market volatility including investment losses, the sector could swing to a loss for the year. Thus, the sum of these losses could become a capital event for the sector in 2020.

“We have revised our 2020 P/C combined ratio expectation for the top 20 global reinsurers to 103%-108%, including a natural catastrophe load of 8-10 percentage points (pps), reserve releases of 2-3 pps, and COVID-19 impact of 6-8 pps, as well as an ROE of 0%-3%.”

Ali Karakuyu Director, Lead Analyst at S&P told a media conference the total cost of COVID is currently being put by reinsurers at $12 billion for the P&C sector with a further $1 billion in the life classes. However, up to 80% of those P&C losses have been designated IBNR meaning that they were yet to be paid.

When asked what would trigger any revision of the negative outlook Mr Karakuyu replied: “If we see signs that the sector will meet the cost of capital on a sustainable basis, we may revise the outlook to stable. However, given the current situation it will not happen until at least 2021.

“We think there is still a risk that the level of rate increases will not be enough to catch up with the current issues and there remains uncertainty that they can generate enough profit to  avoid pressure on their capital and with it their ratings. It is a case of taking a perspective vie won what might happen.

“We have to decide whether the rate increases are enough to drive earnings to sufficient levels.”

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