It’s a Tough Time for Reinsurers, but Their Defensive Strategies Are Working: S&P

October 6, 2015

It’s a tough time for reinsurers — “pricing is soft, regulators continue to raise the bar, capital is at record highs, competition is increasing, and reinsurers are constantly looking for ways to remain relevant to cedants’ changing demands for protection,” according to a new report published by Standard & Poor’s Ratings Services.

Titled “Global Reinsurers Search for Signs of the Bottom at Monte Carlo Conference,” the report came to the conclusion that the industry is confronting these negative conditions with “defensive strategies that for now will protect their market positions and balance sheet strength in this soft market.”

The S&P report provided an overview of topics discussed by attendees at the last month’s 59th Rendez-Vous de Septembre in Monte Carlo including:

  • Reinsurance rates. Reinsurers agree with Standard & Poor’s expectation that the soft market will drag into 2016, although the decline in rates will probably be less severe than in 2014 and 2015. However, the bottom could be near, the report said.

“Standard & Poor’s expects, on average and across all lines, that rates will fall up to 5 percent in 2016.” Although there has been some widening of terms and conditions, most conference attendees said, this was happening at the margins, “and that their companies were agreeing to such terms only for risks they could correctly price and prudently manage.”

  • M&A activity. Reinsurers are searching for areas of growth in this soft market, through M&A activity or organic growth. But, as organic growth is difficult in this climate, S&P predicted more M&A activity in the coming year among smaller companies, which want “added heft to bolster their competitiveness.”

With a diminishing number of potential target companies, “some of these smaller reinsurers may opt to merge with each other or enter into relationships with investment holding companies or corporate conglomerates.” The report cited as examples the EXOR/Partner Re and CMI/Sirius deals. S&P doubts that this consolidation will alleviate the competitive pressure in the market because “we don’t expect much capital to leave.”

  • Alternative capital.While alternative capital continues to grow, S&P said most reinsurers view it as a cycle management tool rather than a threat. Some reinsurers feel it “will be more disruptive if alternative carriers are able to broaden their coverage beyond commoditized lines,” such as casualty lines, the report said.

“Virtually all global reinsurers are participating in the alternative capital space in one way or another, and some traditional reinsurance products are looking to emulate features of ILS protections,” the report said. “We expect that reinsurers will continue to harness the power of alternative capital because it provides some diversification to their income stream, allows them to grow their gross footprint, and protects capital by maintaining a more modest net position.”

  • Cyber crime coverage. Until all the risks are better understood, the industry is generally taking a wait-and-see attitude toward offering greater cyber crime coverage. “Opinions about this risk class vary greatly, with some seeing it as an immediate area of growth while others view the risk as uninsurable,” said the report. Insurers’ caution is based on the difficulty in defining what is covered, and then being able to accurately price and structure contracts, S&P explained.

“Most attendees were clear that this coverage could be a major opportunity for their companies – but only once it’s better understood. Until then, many reinsurers say they will take a pass, fearing they could ultimately be caught in a long and messy situation similar to what the industry has faced with asbestos claims.”

Large Reinsurers More Resilient

As a result of the actions that global reinsurers are taking or will take, S&P doesn’t expect the industry’s current rough patch to result in widespread ratings changes.

The report acknowledged, however, that big is better in the reinsurance space. Indeed, it said, despite soft pricing, most large, European global reinsurers’ premium revenue grew in the first six months of this year.

“We suspect this is because these companies can increase their share of business with existing cedants by leveraging their expertise, size, and scope to write private or bespoke deals that don’t reach the open market,” the report said. “Many bigger reinsurers tell us that recent growth has been driven by these large, tailored transactions, which tend to have more favorable economics than business won in the competitive open market.”

Source: Standard & Poor’s

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