Reinsurers will still ‘struggle’ to earn cost of capital in 2022; outlook negative

Global reinsurers will again fail to earn their cost of capital in 2021 and could “struggle” to do so in 2022 as well,  analysts at  S&P Ratings have warned, maintaining an overall negative outlook on the sector.

The global reinsurance sector has generated “weak underwriting results” in the past four years (2017-2020), and this year is likely to be the fifth in a row in which the top 21 global reinsurers rated by S&P will exhaust their annual natural catastrophe budgets.

As of October 25, 2021, S&P had assigned negative outlooks to 29 percent of the top 21 global reinsurers. 62 percent were assigned stable outlooks, and only 9 percent were assigned positive outlooks.

S&P said “the COVID-19 pandemic has further worsened industry losses, especially among these top reinsurers,” adding that the industry continues to suffer from higher-frequency and -severity natural catastrophe losses, fueled by rapid urbanisation and climate change.

Despite the elevated losses, the industry’s capital adequacy has been robust, the agency indicated, and remains redundant at the ‘AA’ confidence level, aided by capital raises and financial markets’ recovery.

“However, the industry still faces secular challenges and competitive market dynamics, remaining fragmented as it battles the commoditization of its business,” according to S&P's credit analyst Taoufik Gharib (pictured). “Once a competitive advantage, capital now is viewed as a relatively cheap commodity because of the influx to the sector from nontraditional sources, sustained by dovish monetary policies.”

Gharib added: “Reinsurers have also struggled to earn their cost of capital, and 2022 could follow the same trend. As a result, we maintain our negative outlook on the global reinsurance sector.”

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