Moody’s turns negative on global reinsurance despite hardening

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Rating agency Moody’s Investors Service has changed its outlook on the global reinsurance sector to negative, saying that despite rising prices “2020 is shaping up to be another disappointing year.”

thumbs-down-negativeMoody’s warns that as coronavirus and other catastrophe loss events have already depleted the annual catastrophe loss budgets of many reinsurers, the chances of a profitable year are slim for many.

“Over the next 12 to 18 months, we believe the operating environment for the sector will be challenging, despite stronger reinsurance pricing,” Moody’s explained.

“Uncertainty around ultimate coronavirus-related losses, along with low interest rates, shrinking reserve releases and more expensive retrocessional coverage will all be a drag on reinsurers’ profitability in the next 12 to 18 months, despite stronger reinsurance pricing,” explained James Eck, VP- Senior Credit Officer at Moody’s. “Coronavirus-related losses and other catastrophe events have already depleted the annual catastrophe-loss budgets of many firms.”

How badly reinsurance carriers will ultimately be affected by the coronavirus pandemic remains to be seen, but as the event is ongoing, many business interruption coverage issues have yet to be resolved and there remain significant downside economic risks, Moody’s is not positive.

Reinsurance rates need to harden further, Moody’s believes, as so far they are not sufficiently high to offset volatile reinsurer results.

“We expect the current pricing upturn will last through 2021, and a majority of our primary companies are expecting price increases of +5% or more across the board next year,” the rating agency forecast.

Plunging interest rates, social inflation related costs and higher priced retrocession, are all added challenges that reinsurance firms now face, and Mood’s notes that alternative capital is likely to continue to adjust its ambitions in the space in search of higher, more stable returns, which could further impact reinsurers operational abilities and costs.

The gross to net strategies of some reinsurers are being tested as a result of this, alongside the retrenchment from certain catastrophe exposed regions such as Florida wind and California wildfire.

On top of all of this, Moody’s sees climate change as another challenge that reinsurers need to adapt to, as more frequent weather-related catastrophes are creating “a number of risk management challenges associated with the assessment, measurement and mitigation of catastrophe risks, and has increased the volatility of firms’ results.”

All of these factors are expected to drag on reinsurer profitability going forwards, suggesting a need for more rate and more efficiency in the market, in order to return profits to sustainable levels over the longer-term.

Which is positive for the insurance-linked securities (ILS) sector, as ILS funds and investors will be able to benefit from the improvements in rates, while also benefiting from any improvement in underwriting discipline that emerges.

How this could all affect reinsurers strategies for using more alternative capital remains to be seen.

When underwriting profits are slim to dwindling, sharing them with other sources of capital may not be as profitable as keeping them for yourself.

Because of this, as Moody’s noted, the gross to net strategy, of writing more business and utilising retrocession and third-party capital to assist in growth, while earning fees, may prove less tenable for smaller players that cannot deliver the portfolio sizes required to make this a truly long-term strategy.

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