Hard reinsurance market may have weakened some cedents

Direct insurers could see their credit ratings come under pressure as a hard reinsurance market shifts costs and earnings volatility to primary carriers, Morningstar has warned.

“Higher attachment points, more exclusions, reduced coverage terms, and higher reinsurance prices have left many insurers with more risk on their balance sheet,” Morningstar analysts wrote in their latest research.

Primary carriers who either can't hold margins by hiking rates apace or can't stave off earnings volatility by buying as much reinsurance coverage may face “adverse credit rating implications,” authors warned.

The common reaction for carriers of retail lines has been to trim reinsurance coverage and open the door to greater earnings volatility, Morningstar claimed. Alternatives were few: regulated rates stood no chance of keeping pace with sudden runaway inflation.

The higher attachment points and higher co-participation rates most frequently used to trim overall reinsurance coverage “could increase income volatility and negatively pressure their credit rating,” especially for lower solvency carriers.

Commercial line carriers, in turn, have been better able to push the reinsurance cost increase onto clients.

Reprieve won’t come soon. “We expect the challenging reinsurance market conditions to persist over the short to medium term but to moderate with lower inflation and as reinsurance capacity increases,” authors said, citing chiefly suppressed reinsurance capital levels and upwards drivers on demand for reinsurance.

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