S&P Global Ratings is maintaining its negative outlook for the reinsurance sector because it won’t earn its cost of capital in 2020—just as it has struggled to do in the past three years.
This is partly due to the pressures of COVID-19, but the related pricing rises indicate that opportunities still exist in these challenging times, Ali Karakuyu, S&P Global Ratings analyst, told Monte Carlo Today.
The negative outlook is influenced by the projected insured losses due to COVID-19, lower investment returns and the financial market volatility in Q1, as well as deterioration in underwriting performance.
However, there is a mitigating factor. “The sector entered the 2020 pandemic with a robust capital position that was built over the years,” said Karakuyu.
“That said, the top 20 reinsurers that we look at have already reported COVID-19 losses of $11 billion on the P&C side and close to $1 billion on the life side—particularly the mortality side, due to potential mortality losses.
“A significant portion, about 70 to 80 percent, is not-yet-paid claims—so the industry has put aside a significant portion of reserves.”
He added that with estimates of industry losses going up to £100 billion, there is still a lot of uncertainty about how the actual losses will pan out, particularly on the business interruption side.
“The industry has put aside a significant portion of reserves.”
Ali Karakuyu, S&P Global Ratings
“On the positive side I think COVID-19 has helped the industry to keep the pricing improvement momentum which has been taking place on the back of the recent heavy cat years,” he said.
“We have seen substantial levels of pricing increases in 2020 and we believe the positive momentum will carry on for 2021. In fact, some reinsurers have raised capital with a view to taking advantage of potential growth opportunities on the back of these rising prices.
“Some have pulled back from their potential share buybacks, again with a view to utilising that capital to attract better priced business, and at the same time—as we have seen in the past—there is always capital waiting on the sidelines to enter.”
Karakuyu added that, depending on how much capital comes into the sector, the pricing increases may not be as good as the sector has been expecting, with cheap money flowing into the reinsurance space, expanding capacity and putting pressure on pricing.
“At the same time, we should keep in mind the potential losses on the US casualty lines,” he said.
“That is also a challenge for the reinsurance sector, which obviously will need to make sure there are sufficient levels of pricing increases—not just for COVID-19 losses but also for the US casualty lines.
“Those who can navigate these challenging conditions and make use of the pricing rises will come out of it in quite a good position,” he concluded.
Main image: shutterstock.com / Sergey Tinyakov