Robust capitalisation helps global reinsurers weather the storms

The recent catastrophe losses have changed the market dynamics: rates will increase, benefiting a sector that S&P Global Ratings views as robustly capitalised overall, as David Masters of S&P Global Ratings explains to SIRC Today.

In the run up to the Monte Carlo Rendez-Vous, the global reinsurance landscape was relatively stable and steady. The market expected more of the same: rates to be flat to decreasing as the sector grappled with the implications of the elongated soft market.

The perspective of S&P Global Ratings at that point reflected this. The rating agency had the global reinsurance market on a stable outlook based on its continued robust levels of capital adequacy. This was supported by the strong approach to enterprise risk management (ERM) in the sector as well as benign catastrophe losses in the first half of 2017.

It is a cliché, but that was to be the calm before the storm—or storms. The hurricanes Harvey, Irma and Maria that were to subsequently devastate parts of the Caribbean and the US combined with earthquakes in Mexico and wildfires in California were to change the dynamics of the industry completely.

David Masters, a director, EMEA insurance ratings, S&P Global Ratings, says the events could come to represent the most significant year for catastrophe losses the industry has ever seen. It is now estimated that the combined events of Q3 could mean insured losses of more than $100 billion.

“We believe that reinsurers will bear not all, but a significant proportion of that,” Masters says. “Alternative capital, primary insurers and the National Flood Insurance Program will also bear some of the loss, but the implications for the reinsurance sector will be significant.

“We also believe there could be some creep upwards in those loss estimates as flood and business interruption claims continue to come through.”

Since the events, S&P has already taken two ratings actions on reinsurers: it has moved Lloyd’s A+ rating to negative outlook from stable, and XL Group’s A+ rating to stable from positive.

“We have been asked why there have not been more ratings actions thus far. The main reason is that we feel there was already something of a capital buffer in place before the hurricane season and we also see reinsurers as being able, at least partially, to regenerate their capital position over the next two to three years as pricing conditions improve,” Masters says.

“We will continue to monitor reinsurers' exposures and the net impact from these events as well as whether they become a capital event beyond our expectations for the outliers. We could take additional negative rating actions as we deem necessary.”

Masters adds that S&P analysis has suggested that at the end of 2016, the world’s top 20 global reinsurers had some $41.6 billion in capital reductant at the single-A rating level, based on S&P’s proprietary capital model.

The big question for most reinsurers is how rates will now react. Masters says that heading into Monte Carlo, the rating agency was predicting rate decreases of between 0 percent and 5 percent for 2018 renewals.

The recent cat losses have changed the pricing dynamics, he says, and S&P is now predicting average rate increases of between 0 percent and 5 percent although it could be higher (double digit) on loss-affected lines and potentially also on US national accounts.

He believes that rates in Asia will also be affected by the change in momentum in the market, and that rate decreases had been quite steep in the region in recent years and reinsurers will now be looking to rectify the situation.

“They will be looking to earn some of the losses back and they will look at their global portfolios, not just North America,” he says.

Before the recent losses, the market had often pondered what effect the prevalence of alternative capacity in the market would have on hardening rates. If such capacity could enter quickly and easily it may dampen any increases, some suggested.

Masters says it is too early to tell whether this phenomenon will become a reality. Some believe that the fact that many insurance-linked securities (ILS) funds have ended up with collateral trapped after the recent losses—meaning they now have to double up and reinvest—will put them off committing even more cash.

Others believe there was so much capital waiting on the sidelines for a hard market, that it is inevitable they will now enter the market and this will dampen increases. Masters says it is too soon to tell.

“There is no clear view yet, but rate increases for traditional reinsurance will partly depend on the reaction of ILS capital to the losses,” he concludes.

Masters will be speaking at SIRC at 10am on Thursday November 2 in a session titled Views from the Global Reinsurance Market—Pre and Post Hurricane Season.

Get the latest re/insurance news sent to your inbox every day -  Sign up to our free email newsletters

Other stories from the SIRC Day Three newsletter

Asia Capital Re boss says it will not seek new buyers after sale talks fall through

Asia is ahead of game in use of open architecture platforms for insurtech

IAG insurtech hub aims to drive innovation in Singapore

Reinsurers grapple with ‘new world disorder’

Keep your discipline when innovating

2018 will be year of blockchain for insurers

Swiss Re eyes agriculture growth in Asia

IoT, AI and enhanced data to transform re/insurance

‘A long way to go’ to close the gap

Reinsurance helps Sri Lankan insurers absorb volatility

New regulations to drive discussions

Global reinsurers’ ‘measured response’

AEC will boost penetration in SE Asia

Pricing for non-cat property stable

Qatar Re appoints new CEO of its Singapore branch

Technology and pricing main concerns of brokers

Don't miss our insurtech email newsletter - sign up today