Standard & Poor’s Ratings Services has published two reports, coinciding with the Reinsurance Rendezvous in Monte Carlo, which examine the reinsurance industry’s progress in implementing risk management techniques, the current pricing levels for reinsurance, and the possible effect on company ratings.
The first article indicattes that global reinsurance companies are “facing complex risks, increasingly strict regulations, and the opportunity to seize a competitive advantage.” S&P concludes that these challenges and opportunities may also give global reinsurers “many motives for improving their enterprise risk management (ERM).”
S&P’s article – “Reinsurers Continue To Lead In Enterprise Risk Management” – found that “overall, the insurance industry is making progress in this area, but reinsurers are leading the pack for a few reasons.”
Credit analyst Keith Bevan explained: “”Reinsurers generally face more complex risks than insurance companies do, and reinsurance companies are now recognizing they can get a leg up on their competition by improving their ERM. Also, greater regulatory scrutiny is giving reinsurers an incentive to include more comprehensive risk management in their business models.”
S&P noted: “Our ERM assessment designates a (re)insurer’s ERM as excellent, strong, adequate, or weak. We consider approximately 80 percent of global insurers and reinsurers to have adequate ERM, with about 15 percent in the strong or excellent categories, and the remaining 5 percent in the weak category.
“This scoring distribution is consistent across most regions and sectors. However, reinsurers are an exception. Of the 33 reinsurers we assess globally, about 39 percent have strong or excellent ERM, nearly 58 percent have adequate ERM, and only 3 percent are in the weak category.”
In the second report S&P said it is “maintaining its stable outlook on the global reinsurance sector, albeit with considerable caution.”
The report – “Global Reinsurance: 2009 The Year Of Reckoning” – notes:” Macroeconomic headwinds, when coupled with the cyclical threats already confronting reinsurers, leaves little, if any, room for a continuation of the downward trend in pricing seen thus far during 2008. Consequently, further widespread price reductions would likely lead to a change in the sector outlook to negative.”
Credit analyst Peter Grant added that S&P’s “single largest concern for the sector over the medium-term is that reinsurers will fail to adjust their pricing upward quickly enough to account for what we believe could be a step change in both the frequency and severity of claims. This would cause even a modest further decline in pricing levels at the next renewal to result in a material reduction in rate adequacy.”
The report also looks in detail at the impact of the credit crisis and what the issues for the reinsurance market will be in 2009.
Source: Standard & Poor’s – www.standardandpoors.com