Reinsurance market faces longer soft market than forecast: S&P

The global reinsurance market is facing unfavourable conditions from a wide range of headwinds, according to rating agency Standard & Poor’s.

Speaking at S&P’s global reinsurance highlights 2016 briefing, which gave a snapshot of the market before this year’s Monte Carlo Rendez-Vous, Dennis Sugrue, senior director at S&P, said that the rating agency foresees a rocky road ahead for the reinsurance industry.

“The soft market has gone deeper and longer than we had expected a few years ago,” he said at the briefing. “There was talk in 2014-15 that the way that the market was going we’d expected cycles to be shorter and shallower than we’ve seen in the past, but I think that this market has continued on longer than many in it had expected it to and some of the rate declines have been steeper than expected.”

According to S&P credit conditions remain weak and reinsurers will ‘continue to struggle to generate the returns of the past’. The rating agency attributed this to the fact that supply and demand dynamics continue to impact pricing, with organic growth difficult to come by. It added that it expects softening prices to continue, 2016 being predicted to see average reductions of up to five percent, with little benefit from releases or investment returns
Despite this S&P said that its ratings on global reinsurers reflected “these firms’ extremely strong capital adequacy, enterprise risk management and competitive positions”, which the ratings agency said should enable them to withstand these unfavourable conditions over the next year.

However the rating agency added the caveat that outsmarting the market was becoming increasingly difficult. According to S&P reinsurers have been able to respond to past negative pressures with a number of tactical shifts, such as shifting into niche lines of business with more favourable pricing/profit margins and moving away from excess of loss reinsurers to proportional or primary business. Sugrue warned that options for withstanding persistently weak business conditions and becoming increasingly limited, as many companies have already exhausted the easier tactical manoeuvres.

S&P also predicted that the difficult conditions will be harder on some reinsurers than others, with the gulf between small reinsurers and their larger counterparts widening. According to the rating agency the largest reinsurers “are best placed to weather the storm, as long as the smaller firms don’t rock the boat too much.”