Global Reinsurers See Promising Green Shoots in 2019 with ‘Hardening’ Pricing: S&P

June 5, 2019

Following disappointing reinsurance pricing increases in 2018 and early 2019, it seemed that no amount of catastrophe losses would be sufficient to harden the overall market. However, during this year’s April and June renewals, reinsurers saw some green shoots, with property catastrophe rate increases in the 15% to 25% range on loss affected accounts, according to a report published by S&P Global Ratings.

At this stage in the cycle, S&P characterized the current global reinsurance pricing environment as a hardening market rather than a hard one. In a report published today, titled “For Global Reinsurers, 2019 Pricing’s Green Shoots Look Promising.”

Overall, reinsurance pricing assumptions were challenged by continued loss creep from catastrophe losses in 2017 and 2018, which also hit alternative capital such as insurance-linked securities and collateralized reinsurance funds, said the report.

Alternative capital’s growth has slowed recently because of dismal returns and spread widening in high-yield corporate bonds, exacerbated by governance issues at certain funds, which triggered investors’ redemption requests, S&P continued.

Despite these recent developments, S&P still believes alternative capital backed by long-term investors remains committed to property catastrophe risk and is here to stay. “We expect, once the recent bumps are smoothed over, growth will gather steam again,” said the S&P report.

S&P Global Ratings said it maintains a stable outlook on the global reinsurance sector and on the majority of the reinsurers it rates, reflecting reinsurers’ still-robust capital adequacy although below historical levels due to active catastrophe years in 2017-2018, unrealized losses on fixed-income securities because of higher interest rates in the U.S., and fourth-quarter 2018 stock market volatility.

Thus far, strong enterprise risk management has helped reinsurers maintain relatively disciplined underwriting, S&P added.

“The seminal question is: Will the recent green shoots will take root and lead to sustainable profitability, thereby enabling reinsurers to earn their cost of capital, or will they wilt over time? Thus far, the trend looks promising,” said S&P Global Ratings credit analyst Taoufik Gharib.

Source: S&P Global Ratings

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