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Moody’s cuts reinsurers’ outlook to negative

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Moody’s has cut the reinsurance sector outlook to negative from stable despite the best pricing environment in over a decade, as the industry faces low interest rates and uncertainty around ultimate pandemic-related losses.

Shrinking reserve releases and more expensive additional cover for reinsurers are also presenting a drag on the industry, the ratings firm says in a new report.

“Coronavirus-related losses and other catastrophe events have already depleted the annual catastrophe loss budgets of many firms,” VP-Senior Credit Officer James Eck said.

The impact of the pandemic remains difficult to estimate, with the event still affecting multiple lines and geographic regions. Many business interruption coverage issues are yet to be resolved and significant downside risks remain for the economic recovery.

Moody’s says a pricing upturn will last through next year, with many companies expecting gains of at least 5% across the board, but it is nevertheless changing its outlook on the sector.

“Reinsurance pricing has been rising since 2018, but rates need to increase further to offset volatile results,” the report says. “We think there are numerous challenges reinsurers face that outweigh the benefits of high pricing – at least for the next year or so.”

Property catastrophe reinsurance pricing, a key driver of reinsurers’ overall profitability, remains about 15% below 2012 levels.

Moody’s says climate change is also a longer-term challenge for the sector, with weather-related catastrophes becoming more frequent as temperatures increase and sea levels rise.

S&P Global Ratings last week affirmed its outlook remains negative after assessing the sector won’t earn its cost of capital again this year after struggling to do so for the past three years.

The company forecasts reinsurance pricing momentum will continue after being supported by natural catastrophes and pandemic losses.

“In a nutshell, overall reinsurance pricing has been hardening with tightening terms and conditions, further supported by the outbreak losses, which will carry the momentum into 2021,” it says.

Fitch Ratings also maintains a negative outlook for 2021 but says reinsurers are generally well-positioned to absorb pandemic-related losses.

“Most rating actions over the next 12 months will probably be affirmations, barring an extreme catastrophe event or a severe deterioration of the coronavirus crisis,” it says.