Analysts at S&P Global Ratings have opted to maintain their negative view on the global reinsurance sector, but have said there are encouraging signs that the market could finally be facing a turnaround.
S&P’s negative view reflects the expectations of credit trends over the next 12 months, including the distribution of rating outlooks, existing sector-wide risks, and emerging risks.
19% of the rating agency’s ratings on the top 21 global reinsurers were on CreditWatch with negative implications or had negative outlooks, while 76% were assigned stable outlooks, and 5% were on CreditWatch positive.
But pricing improvements have persisted for most lines of reinsurance business this year, with property catastrophe lines now considered by S&P to be experiencing a full-on hard market environment.
Doubts remain as to whether these pricing improvements will be enough to combat the headwinds that have muted reinsurance returns for years, but S&P does expect that underwriting profitability will improve in 2022-2023 in both property/casualty and life reinsurance.
Specific challenges to overcome include the combined impact of higher frequency and more severe natural catastrophes, untamed inflation across the world, mark-to-market investment losses eroding capitalization, and the Russia-Ukraine War.
The scope of these problems does mean that many reinsurers will likely struggle to sustainably earn in excess of their cost of capital and capital buffers will be eroded.
But improving underwriting earnings, increasing investment income, prudent capital management, and sophisticated levels of risk management should sustain the industry’s capital adequacy.
S&P believe fundamental, disciplined underwriting and adequate risk pricing, tighter terms and conditions with clear exclusions, and overall sophisticated risk management are key if reinsurers are to defend their competitive position and preserve earnings and capital strength.
On the bright side, reinsurance pricing is improving with the expectation that it will carry on into 2023 renewals, and new underwriting opportunities could be the lifebuoy needed for the sector to regain its footing and begin to earn its cost of capital once again.