S&P maintains negative reinsurance outlook as concerns over losses persist

Ratings agency S&P Global Ratings retains a negative outlook for the global reinsurance sector, despite moves by the industry to improve its overall performance and pricing after 18 months of significant loss activity.

The market has failed to meet its cost of capital over the recent years, and while numerous firms have clearly signalled that they will be seeking significant rate increases at the upcoming renewals, that doesn’t mean that the overall outlook will improve significantly.

S&P Global Ratings director and lead analyst, insurance, Ali Karakuyu sat down with the 1.1 Club, Intelligent Insurer’s online, on-demand platform for one-on-one interviews with industry leaders, to explain the agency’s approach to the sector.

As the European industry meets in Baden-Baden, it is becoming increasingly clear that reinsurers are drawing a hard line on pricing after another heavily loss-impacted year.

Flooding in Germany has dealt European carriers in particular another unexpectedly costly series of losses, and the events have prompted a wholesale rethink of exposures in the region as secondary perils come to the top of the industry’s agenda.

Karakuyu acknowledges that the price rises are an initial step in the right direction, but he warns that the loss activity of this year means the industry faces yet another year of failing to meet its cost of capital.

“Over recent years, the sector has been struggling to meet its cost of capital. Yes, we appreciate the fact that on the back of heavy cat losses in recent years, the sector pushed hard on the pricing. So we have seen a positive pricing momentum in recent years, which is still continuing,” he said.

“When we look at the key renewal dates for this year, albeit at a lower level than companies might have expected, low single-digit pricing increases are still continuing.

“But of course the cat events are happening, and already 2021, with European flood losses, is looking like another year where reinsurance cat budgets may not be sufficient to meet such losses,” he explained.

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Not enough?

Despite the encouraging signs of price rises and a tougher stance being taken by many companies, Karakuyu warns that overall these increases may not be enough in certain segments of the market to offset exposures.

“We still think that although pricing has been increasing, there are still some pockets, for example US casualty, that need to catch up with the pricing,” he said.

“We are not yet comfortable to say we think the sector is going to meet its cost of capital over the next two years. So we are maintaining our negative outlook on the global reinsurance sector.”

The analyst highlighted the impact of poor returns on the investment side of the balance sheet as another driving factor behind the negative outlook and a reason, he believes, that the industry will struggle to meet its cost of capital in the coming years.

Given that interest rates remain at historic lows, and in some parts of Europe are actually yielding negative returns, that dynamic continues to weigh on the sector’s outlook.

“On the European side in terms of the negative outlook, if you observe various companies within the top 21 that we look at, there’s a small portion which have a negative outlook, including European ones,” Karakuyu said.

“The reason for that is not the COVID-19 pandemic, not because of the cat losses only in recent years, but historically and then if you look at the pricing environment, bearing in mind we are still in a low investment income or low interest rates.

“The operating performance for some of these companies which are on a negative outlook is a bit uncertain whether or not they can revert to a good level of performance that would support a good capital position over the long term.”

The flooding in Europe has been a particular drag on the results of carriers on the continent, with the event dealing billions of dollars’ worth of losses in a concentrated area which had previously not seen events as severe as those experienced during the summer.

Karakuyu said that as a large segment of those losses had hit the reinsurance market, and that retrocession capacity remained relatively tight, it would inevitably lead to higher prices being asked by carriers in the upcoming renewals.

“Given the fact that a big portion of the European floods is going up to $12 billion, the reinsurers will be asking for pricing increases to make up for some of the payments they had to make on those floods,” he said.

“Remember that on the retro side, there has been a shortage of capacity. Hence the reason for the growth of alternative capital we are seeing.

“In essence the retro market has seen a lot of increases and now you’ve had the floods. That makes the market quite attractive for the alternative market capital that comes in as they see the opportunity.

“So net, the European floods are going to mean more pricing increases being asked for by the reinsurers.”

To view the full 1.1 Club interview click here