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Pressure grows on reinsurers: S&P

Increasing competition, declining premiums and an influx of third-party capital is turning up the heat on global reinsurers, according to a report from Standard & Poor’s (S&P).

The ratings agency warns reinsurers’ competitive positions and financial strength are under threat and earnings will likely be curtailed this year and next.

S&P says ratings on global reinsurers are sensitive to changes in their risk position, and continued competitive pressure, reduced earnings potential and increased industry risk may cause outlooks to turn negative.

However, reinsurers are working to mitigate the effects of competition and have not yet “succumbed to the temptation to use inadequate pricing to retain market share”.

Instead, they are seeking more profitable markets or tweaking investment strategies to increase returns, the report says.

Diversified reinsurers are reducing exposure to property catastrophe, where prices have fallen significantly, and smaller businesses are teaming up to gain scale.

“Larger primary insurers increasingly make their reinsurance purchasing decisions at the group level, an approach that tends to favour large, ‘top-tier’ reinsurers that can meet clients’ demands by providing a number of products,” S&P says.

“In response, smaller players, especially those in the London market, have combined forces, giving them the ability to offer clients large blocks of capacity.

“So long as the current pressure on premium rates continues, we expect merger and acquisition activity to be high on some companies’ agendas, in particular fuelled by limited growth opportunities and the need for economies of scale.”