Reinsurance Rates Continue to Soften with No End in Sight: S&P

June 23, 2017

The global reinsurance sector is poised for yet another full year of declining rates, ensuring that a hoped-for bottom of the current market cycle will remain elusive in 2017, Standard & Poor’s said in a new report.

The continued downward rate trend for global reinsurers can be traced to the usual suspects: too much reinsurance capacity, a number of years of modest insured losses and heavy competitive pressures from “cheaper alternative capital sources.”

Combined “these forces have put predictable downward pressure on pricing which is testing reinsurers’ ability to source attractively priced risks and adapt to the environment,” the S&P report noted.

Global property catastrophe pricing dropped approximately 4 percent to 6 percent both on Jan. 1 and April 1. In the U.S. renewals were flat or down 5 percent on Jan. 1 and April 1. Europe was even worse, with renewal price drops of 3 percent to 15 percent on Jan. 1, according to S&P’s tabulations.

In Asia, reinsurance renewal prices declined 5 percent to 15 percent on Jan. 1, and 10 percent to 20 percent on April. Assumed retrocession, meanwhile dipped 2.5 percent to 5 percent on Jan. 1, with a similar pricing floor on April 1, S&P said.

The same pressures may be in play, but S&P said reinsurers are finding their way through the continued obstacles with sound planning and ingenuity.

“Reinsurers are navigating these issues with sophisticated enterprise risk management programs, strong capital adequacy, and still-rational underwriting (so far),” Standard & Poor’s said. “All of this supports our stable outlook on the reinsurance sector and our ratings on the majority of companies in it.”

Cheap Capacity Has Consequences

S&P warns, however, that reinsurers should not seek aggressive growth through underpricing.

“Any aggressive growth through underpricing – especially in the softer lines – while providing cheap capacity to cedents will likely trigger negative rating actions,” the ratings agency said.

In January, A.M. Best was a little more optimistic about the reinsurance market. It acknowledged similar pressures, such as sector overcapitalization, and intense competition, but also suggested the market maybe be hitting bottom because brokers are struggling to fill underpriced programs and additional concessions in terms are hard to obtain.

In May, Fitch Ratings said that soft pricing in the global reinsurance market will continue at least through the end of 2017.

Source: S&P

This article first appeared in Insurance Journal’s sister publication, Carrier Management.

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