Rating agency Moody’s has changed its outlook on the global reinsurance sector from stable to negative. The global coronavirus pandemic, climate change and social inflation are all key factors outlined in a report published on September 8 by Moody’s, “Reinsurance–Global: Outlook turns negative as profitability weakens, despite higher pricing”.
“The view is that profitability hasn’t been good and there are a lot of uncertainties that tip us towards the negative despite higher pricing,” the report’s author James Eck, vice president–senior credit officer for Moody’s, said in a media briefing.
“The coronavirus claims have been pretty high so far. We think there is a lot more to come, and that is breeding a lot of uncertainty for the companies; it’s a very challenging operating environment.”
Eck added that low interest rates, social inflation and higher retro costs are also going to have a negative effect on profitability, and climate change is another key factor, with the increased frequency of cat events creating volatility for the sector.
“On the positive side, reinsurance pricing is moving up—but we think much more rate is needed,” he said.
“Capital remains strong and the growth of alternative capital has stalled for now at least, which has enabled pricing to move higher.”
He noted that while reinsurance is known as a volatile sector, it has had a particularly challenging few years, especially in 2017 and 2019—and now in 2020. With low profitability and cat event frequency increasing, Moody’s considers the returns to be insufficient relative to the risk and volatility for the sector.
Eck highlighted coronavirus-related claims and economic downturn as adding greater uncertainty. While some of the losses stemming from the first half of the year—such as event and travel cancellations—are fairly well understood at this point, Moody’s notes the coverage issues around business interruption as problematic.
“We have other lines of business that are going to start seeing adverse effects from the economic downturn—lines such as D&O E&O, employment practices liability, medical professional, workers’ compensation, credit and surety and others,” said Eck.
On the question of what it would take to move to a stable outlook, he said a lot depends on the COVID-19 situation: if the world gets through the pandemic, capital remains good and pricing continues to move up, that would be a good argument to move back to stable.
“On the economic side the recovery is under way—we will see how strong it is,” he said.
“Much will depend on how well we can contain the virus. The longer this stays out there, the more difficult it will be, and low interest rates are certainly possible for a very extended period at this point.
“Pricing has been pretty strong but if you take a step back and look at where the pricing has come from, you can see we have a way to go and property cat is still below where it was back in 2012.
“This gives a longer-term view that a lot more rate is needed to get the sector back to be able to earn the type of returns it has in the past.”
Eck added that climate change creates longer-term challenges for the companies, with weather-related losses moving higher over time and companies repeatedly needing to reassess their view of the risks.
“We’ve seen companies have to look at California wildfire and change the models, at Japan typhoon and change the models, at hurricane-induced rainfall and change the models—it seems that every year we are getting events that cause companies to rethink their view of cat risk,” he said.
“Companies are doing what they can to update their models and raise pricing, but it creates additional complexity and challenges for companies to put through pricing that is going to be adequate for the trend that appears to be much higher cat event frequency,” he concluded.
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