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S&P suggests reinsurers might need a new playbook

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S&P Global Ratings has questioned if reinsurers are “complacent in their centuries-old industry” as they battle the commoditisation of their business and the rise of alternative capital that is “nibbling” at their margins.

“In response they could take a page from the playbook of other disrupted industries to stay relevant and become more innovative,” the ratings company says in its 2020 Reinsurance Sector Outlook.

The report says the sector didn’t earn its cost of capital in the past two years but the current year looks “somewhat” more promising. S&P maintains a stable outlook for reinsurance, while challenging the industry over its response to competition headwinds.

“Are reinsurers complacent in their centuries-old industry and stuck in their old ways of doing business?” it says.

“Are reinsurers sitting on their hands awaiting external forces of change, or are they self-critical enough to initiate change from within? These are some of the seminal questions that reinsurers need to tackle in the years to come.”

S&P has revised its earnings forecast for the sector slightly upward for this year and next following hardening reinsurance prices, with an expected combined ratio of 95-98% and a return on equity of 7-9%.

But it warns that competitive trends haven’t abated even after back-to-back record catastrophe years in 2017 and 2018.

“The sector continues to battle secular headwinds as the influx of alternative capital challenges reinsurers’ business models, despite its recent slowdown, and we expect its growth to pick up once the latest bumps are smoothed over,” the agency says.

Modest reinsurance rate increases at the start of the year have picked up steam with larger gains at the mid-year renewals and tightening terms and conditions.

S&P says the momentum is expected to continue, but it characterises the pricing environment as a “firming” market rather than a hardening one.

Global aggregate rate increases up to mid-single digits are expected over the next 12 months, assuming an average catastrophe year, it says.

“Although the current environment gives reinsurers some breathing room, the underlying factors spurring secular changes with in the sector remain intact.”

It says capacity remains plentiful and commoditisation will advance, especially within the property-catastrophe market, and the sector will be pushed to evolve and become more innovative.

“For now, reinsurers are optimistic about the pricing environment, but a long road to ensure continued relevance lies ahead,” S&P says.