Capital Adequacy Is Key Strength of Reinsurers in Difficult Market: S&P

By L.S. Howard | February 22, 2016

Strength of capital and good enterprise risk management are two of the main reasons the global reinsurance industry will be able to maintain a stable outlook during 2016 from Standard & Poor’s Ratings Services, despite the many competitive pressures it faces, according to Taoufik Gharib, S&P director.

“We have a stable outlook but we’re cautious about the outlook going forward. In other words, the industry continues to be under pressure when it comes to earnings,” said Gharib, who discussed the outlook for the global reinsurance industry in a recent S&P webcast.

Despite the many competitive pressures buffeting the industry, Gharib said, capital adequacy is a key strength of the reinsurance sector. “The industry has benefited from strong earnings over the last few years,” driven by reserve releases and benign catastrophe losses.

Indeed, he said, global natural catastrophe losses totaled $31 billion in 2015, relatively flat from 2014.

The most expensive manmade disaster last year related to the Tianjin explosion in China in the third quarter, originally estimated to cost between $1.5 billion and $3.5 billion. According to the latest estimate, however, that loss has increased and is now expected to cost the re/insurance industry between $5 billion and $6 billion, Gharib went on to say.

One of the industry’s main additional strengths relates to enterprise risk management, he noted, with reinsurers among the leading practitioners in the industry.

Gharib then discussed some of the trends affecting the industry in the current marketplace.

One is the ongoing consolidation within the reinsurance sector, mostly driven by the hunt for greater scale and diversification, he noted.

Gharib explained that organic growth is hard to come by, as reinsurance premiums are correlated to the growth in GDP. “Given what the global economy has been going through over the last few years, it’s obviously hard for reinsurers to grow their business [organically].”

Changes in Reinsurance Buying

Another trend that is driving reinsurer acquisitions is the fact that primary insurance companies have been retaining more of their risk on their balance sheets, given the earnings pressure they also have on their side of the business, he explained.

Further, reinsurers are being forced to increase their scale because of the change in reinsurance purchasing behavior by the primary companies, he affirmed. “Over the last few years, we have seen that the large national and large global insurance companies have been moving their reinsurance purchasing decisions to their holding companies to benefit from economies of scale.”

As a result, reinsurers’ size matters particularly “when you have large primary companies looking for a reinsurer to provide multiple products in different geographies.”

And last but not least is the growing competitive pressure from alternative capital, which Aon Benfield estimated to be around $69 billion in 2015, and could easily reach $120 billion to $150 billion by 2018, Gharib affirmed.

And, of course, alternative capital, along with low catastrophe losses, also puts pressure on pricing, particularly in property catastrophe reinsurance, he said.

January Renewals

Overall, at the Jan. 1 renewal, U.S. property & catastrophe reinsurance prices were down 5 percent to 10 percent, he said, noting that the decline in non-U.S. markets was steeper, in the low double digits.

There is also increased competition in the ceded and assumed retro markets, he added. “One of the key property catastrophe reinsurers in Bermuda mentioned in a recent conference call that its assumed retro portfolio is down by 40 percent…”

In casualty reinsurance, the price declines were somewhat modest, specifically within professional and liability lines. “Credit, surety and motor were flat, but when it comes to the Lloyd’s market, there’s continued pressure, specifically on specialty lines such as energy, global property and terrorism,” Gharib continued.

As a result of these pricing pressures, the industry combined ratio will be between 95 and 100 percent for 2016, which includes a 10 percentage point catastrophe load and a 6 percent benefit from reserve releases.

During 2016, investment returns will continue to be low, while reserve releases “will be less important than in the past” because the declining pricing environment translates into less cushion in the loss picks, he said. “We expect an ROE for the reinsurance industry of between 8 and 10 percent for 2016.”

As some reinsurers already reported for the fourth quarter in 2015, earnings are affected by realized and unrealized capital losses, Gharib said. “We believe that trend will continue going forward, but the strength of capital will help the industry absorb some of the volatility.”

This article was first published on Feb. 19 in Insurance Journal’s sister publication, Carrier Management, both Wells Media Group publications. A separate article covered the comments of Tracy Dolin-Benguigui, director of S&P,  who spoke during the S&P webcast about the U.S. property & casualty industry.

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  • February 22, 2016 at 11:40 am
    Yogi Polar Berra says:
    This is a good article. However, it failed in using the 'Captain Obvious' title, which is both trivial and uninspiring.
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