Reinsurance Price Drops Moderating? Yes and No, Say Rating Agencies

By | September 1, 2015

Two of the property/casualty insurance industry’s ratings entities – Fitch and Standard & Poor’s – do not see eye-to-eye on whether reinsurance price declines are moderating.

Fitch sees the downward trend letting up, but S&P finds that pricing pressures from multiple sources continue without change.

Fitch Ratings said it saw “signs of decelerating rate declines” in the reinsurance market’s most recent June/July 2015 renewals. Fitch added that the data could point to “a new equilibrium” in terms of pricing.

The reason: Fitch noted ongoing pricing pressures for reinsurance, including the continued influx of alternative reinsurance capital from private equity firms, hedge funds, and pension plans. But Fitch suggested that the flow of alternative capital is slowing a bit, and that insurance linked securities pricing has stabilized.

According to Fitch, this “means that the capital market investors may have a waning appetite for reinsurance risk.”

Standard & Poor’s in a report looking at ways P/C reinsurers can withstand the soft market, sees the situation differently.

S&P noted that reinsurers have struggled to increase prices since 2007, and that some players released reserves to support reported profits. Making things worse, Standard & Poor’s noted, is the relatively low level of catastrophe and other claims over the past two years, which it said makes it harder to justify raising rates.

S&P doesn’t see any moderation in price declines.

“Third-party capital is still being attracted to the sector, increasing its capacity to write reinsurance and pushing down prices further,” the S&P report stated.

With S&P expecting price declines to continue unabated, it focuses on which reinsurers can survive best under current conditions. S&P said carriers “that chose to retain prudent reserves for longer” will have a cushion they can draw from. But reinsurers that released reserves more quickly will struggle, according to the report, because they “may find that they have exhausted their ability to support current reported profits from past reserves.”

“In our view, the market is still soft enough that those who raise rates first may not find the rest of the market following suit; they would therefore likely lose market share,” Standard & Poor’s said.

While Fitch sees price declines moderating, it asserts that reinsurers will still face pressure to pursue M&A deals – something that Standard & Poor’s concluded in a separate report.

Fitch said that soft market conditions, however improved, will still lead to consolidation as a way for companies “to combat market stress and limited organic growth opportunities.

Fitch said, however, that it would negatively view deals whose single purpose is to reach greater scale and diversity, “and strategic rationales are unconvincing.”

Hollmer is editor of CarrierManagement.com’s Daily Headlines e-newsletter, where this article originally appeared.

Sources: Fitch Ratings, Standard & Poor’s

About Mark Hollmer

Hollmer is a veteran business journalist and editor of CarrierManagement.com's daily e-newsletter for the property/casualty insurance industry C-suite. He may be reached at mhollmer@carriermanagement.com. More from Mark Hollmer

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