NEWS
The market battles headwinds
S&P retains a negative outlook for global reinsurance sector.
Standard & Poor’s (S&P) is maintaining its negative view of the global reinsurance sector, but expects that underwriting profitability will improve in 2022–2023 in both property/casualty (P/C) and life reinsurance.
In a briefing in London, the rating agency said that reinsurers will continue to struggle to sustainably earn in excess of their cost of capital due to potential heightened natural catastrophe losses, capital market volatility, increasing cost of capital, and high inflation in 2022 and 2023.
S&P pointed out that elevated natural catastrophes and pandemic losses have severely affected performance but sparked reinsurance pricing increases over the past few years, which it expects to carry on into the 2023 renewals. Reinsurers’ strategies diverge on natural catastrophe risk, and S&P believes that alternative capital will remain an important pillar in the reinsurance space.
Ali Karakuyu, lead analyst at S&P, said that the global reinsurance sector could finally be facing a turnaround, with pricing improvements persisting for most lines while property catastrophe lines are experiencing a full-on hard market environment.
However, he added the caveat that it is still uncertain if these pricing improvements will be enough to combat the endless barrage of headwinds against the reinsurance sector that have muted returns for years.
“The speed at which inflation is changing is quite rapid,” said Karakuyu. “It will be several years before we can turn back and see its impact, but it is a key theme.”
S&P said that the combined impact of higher frequency and more severe natural catastrophes, untamed inflation across the world, mark-to-market investment losses eroding capitalisation, and the Russia-Ukraine conflict all threaten the reinsurance sector.
“The global reinsurance sector could finally be facing a turnaround.”
Ali Karakuyu, S&P
S&P Global Ratings’ view on the global reinsurance sector remains negative, reflecting its expectations of credit trends over the next 12 months, including the distribution of rating outlooks, existing sectorwide risks, and emerging risks.
According to the rating agency as of August 31, 2022, 19 percent of ratings on the top 21 global reinsurers were on CreditWatch with negative implications or had negative outlooks, 76 percent were assigned stable outlooks, and 5 percent were on CreditWatch positive.
S&P analysts pointed out that inflation has lasted longer than economists anticipated and has been more severe, with the US Consumer Price Index (CPI) rising 8.5 percent over the past 12 months as of July 2022, now at a 40-year high.
It looks no different in other reinsurance markets such as the eurozone and the UK, with expected CPI of 7.0 percent and 8.7 percent in 2022, respectively, and even Japan is expected to swing from its deflation in 2021 to 2.2 percent inflation in 2022.
S&P also pointed out that over the past several years, the P/C re/insurance industry has been dealing with social inflation, especially in US casualty lines, and now CPI inflation. As a result inflation risk is increasing for reinsurers as it elevates claims costs and potentially affects underwriting results from current and prior accident years, which could overshadow any benefits from higher investment yields.
Main image: Shutterstock / evgris, MaxyM
