S&P Midyear Report Negative on Reinsurers

June 4, 2002

Standard & Poor’s midyear survey of the reinsurance industry highlights a number of problems, with the effects of low returns from competitive pricing, high loss ratios, low investment returns and new liabilities heading the list.

S&P indicated that the industry is still suffering form the overall weakness in premium rates and lax underwriting controls that it experienced over the last half of the 1990’s. It will take more than “a brief interlude of catastrophe-induced price hikes to turn the industry around from its negative outlook,” said the S&P bulletin.

It also cited the effects of the attacks on the WTC, asbestos claims, rising workers compensation payouts and and the increasing number of D&O claims as the principal problems the industry faces. S&P pointed out that even without Sept.11 the industry would still have had a combined ratio averaging 116 percent last year.

Reserves have also declined, and the stagnant equity markets and low interest rates have made it increasingly difficult for reinsurers to make up the shortfall from investment returns.

The announcement included a summary of the industry’s outlook by Don Watson, managing director of S&P, who indicated that,”From 1987 to 1999, reinsurers were able to differentiate performance from primary insurers through better risk selection,but this strategy fell apart in the soft market.”

Watson noted the increasing tendency, both among financial services companies and some insurers, to divest noncore reinsurance operations and, with them, a source of volatile earnings. Even when reinsurance arms are retained, they are often on a much tighter rein. “It raises a question of the strategic importance of reinsurance operations within a diversified group,” Watson added.

S&P analysts are also skeptical of any enduring benefit from the promised bonanza of huge price inflation. “The well could soon run dry, given the wealth of new capital, close to $30 billion, that has flooded the industry since Sept. 11,” said the bulletin. This means increased supply, which depresses prices. In Bermuda’s “bargain basement,” the report points out, some $8.5 billion has flowed into startup insurance ventures, in addition to the $4 billion raised for existing reinsurers there, and “this could have a significant impact on pricing with policy renewals in 2003.”

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