ILS influence adds to reinsurance rate momentum fade: S&P

by Artemis on June 7, 2018

Natural catastrophe losses of just under $9 billion in 2017 wiped out yearly earnings for come Bermudian insurance and reinsurance firms, and while rates have improved so far in 2018 on the back of the events, the growing influence of alternative capital suggests any positive rate momentum could be short lived, according to S&P Global Ratings.

The ratings agency warns that momentum is starting to fade for reinsurance rate increases during the June renewals, which have been described by many in the industry as disappointing following the increases seen at the January and April renewals, on the back of 2017 catastrophe events.

Ultimately, S&P states that the recent momentum on reinsurance pricing could be short lived owing to the supply / demand imbalance that remains, warning that positive rate movements could dissipate heading into 2019.

One reason rates haven’t improved by as much as many in the sector had hoped for following record-breaking levels of catastrophe losses concerns the ability and willingness of alternative capital to reload in time for the January renewals.

S&P highlighted the recent growth and permanence of the alternative capital space in its recent Bermuda Re/Insurance Quarterly Insights report.

“We believe alternative capital passed its stress test last year and continues to come of age, reaching $89 billion as of year-end 2017. As its influence in the reinsurance sector grows, especially in property catastrophe and more recently, life reinsurance, the sector’s competitive dynamics remain intact.

“As a result, the recent momentum on reinsurance pricing rate increases could be short lived. However, we believe that the focus on underwriting discipline and strengthening of balance sheets needs to remain de rigueur,” said S&P.

Numerous industry participants, observers and analysts have noted the impact of the insurance-linked securities (ILS) sector on global reinsurance pricing in a post-event environment, stating that its ability to reload and commitment to the space suggests a flatter underwriting cycle going forward.

S&P is the latest to underline the influence of the alternative capital space, suggesting that market dynamics imply rates could potentially turn flat or even negative heading into 2019, which, after years of falling rates pre-2017 could challenge the business models of some companies.

However, and in spite of the challenges driven by last year’s events, “we are maintaining our stable outlook on the global reinsurance sector mostly because of re/insurers’ strong enterprise risk management, and still-robust capital adequacy,” said S&P Global Ratings credit analyst, Taoufik Gharib.

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