S&P Uneasy About State of Global Reinsurance Industry

May 16, 2000

The string of catastrophes in 1999—the worst year on record for the frequency of natural disasters—has hit the reinsurance industry solidly. This was compounded by weak premium rates, and retrocession recovery problems following the financial difficulties of a number of retrocession underwriters in 1999.

Standard & Poor’s maintains a negative outlook on the reinsurance industry in general. This means that the agency may lower the ratings on a number of reinsurers in the medium term.

Standard & Poor’s said its survey of European reinsurers’ 1999 results paints a very sorry picture. The estimated average combined ratio for the European reinsurance industry’s worldwide results reached a massive 131 percent in 1999, compared with an uninspiring 109 percent in 1998. This is mainly attributed to the highest-ever number of catastrophe events in 1999, with eight estimated insured losses of $1 billion or more.

Although no individual catastrophe caused reinsurers significant difficulty, many companies failed to plan for the number of events that occurred. These claims were compounded by weak premium rates, high claims in the aviation industries, the late reporting of claims arising from 1998 events, and Unicover.

“The total market result will be somewhat lower than the simple average because of the relatively good results of Munich Reinsurance Co. AG (AAA/Stable/–) and Swiss Reinsurance Co. (AAA/Negative/–), the two biggest Europe-based global reinsurers. However, our data shows the difficulties faced by many small- to mid-sized reinsurers in 1999, in the current soft-rate environment,” said Rob Jones, director at Standard & Poor’s Insurance Ratings in London.

Year-2000 reinsurer results are expected to suffer from continued premium rate inadequacy and late reported claim development from the December 1999 storms. Although normally, significant premium increases would follow such weak results, this will not be the case. This is as a result of the many multi-year reinsurance contracts that do not expire until the end of 2000, and the fact that the Martin and Lothar windstorms that hit in December 1999 came too late in the year to significantly influence Jan. 1, 2000 renewal pricing. Although renewal activity is low, rates have increased significantly in some markets, notably retrocession and excess-of-loss, and in territories which have been affected by recent losses, notably the Caribbean, France and Denmark. Rates are expected to increase further for 2001, by which time most multi-year protections will expire.

“Retrocession protection has become relatively scarce since a large number of retrocession writers have left the market,” Jones said. However, the continued plentiful supply of reinsurance capital and availability of alternative protection methods, including capital market mechanisms, will temper rate increases.

Economic levels of return to shareholders are likely to continue to prove elusive without the withdrawal of substantial reinsurance capacity, either by distributing capital to shareholders in the form of dividends and share buybacks, or to policyholders in the form of claims.

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