Moody’s flags 2020 ‘headwinds’ as it gives stable reinsurance outlook

Global reinsurance can expect to face market “headwinds” in 2020, despite strong capitalisation and rising pricing, ratings agency Moody’s has said.

In its Outlook report, published on September 3, the agency gave global reinsurance a “stable” outlook.

“While market conditions are favourable, profitability will be heavily influenced by catastrophe losses, with climate change, growing cyber exposure and rising asset risk further sources of uncertainty,” it said.

“Headwinds in 2020 will come from reinsurers being increasingly exposed to asset risk as low interest rates encourage investment in higher yielding corporate debt and illiquid assets,” the report said.

This makes casualty insurers vulnerable to a potential rise in claims inflation. Moody’s added that this line has “reported declining reserves in recent years”.

Brandan Holmes, vice president, senior credit officer at Moody’s and Outlook co-author, said the key drivers of this stable outlook were strong capitalisation and pricing improvements, which firm up profits.

“Capitalisation has come off a little bit since 2016 but the sector is still very well capitalised and came through the significant cat events of 2017/18 very well,” Holmes said.

This was down to companies generally adopting a more conservative stance.
“They were focused on preserving capital and, for the most part, not returning a lot of capital to investors in response to a soft market and not taking outsized risks to try and boost return,” he explained.

The agency reported “quite a lot of discipline over the time period”, with companies reducing their nat cat exposure. The increased use of alternative capital has also helped reinsurers, particularly to take on property cat risk.

“Over the last five to seven years, concurrent with price softening, we’ve seen peak cat risk being spread more broadly with capital market participants. We saw this helping the sector in 2017 and 2018, so capitalisation remains strong,” he said.

Holmes added: “For some reinsurers we’d probably say where there is excess use of retro in the capital structure that has probably weakened the quality of capital, particularly where they are dependent on annual renewals of that retro and may be susceptible to dislocations of capacity of pricing in that market. But by and large overall it is strong.”