S&P rating rejig could build new pockets of reinsurance demand

Insurance carriers hit by changes to the  S&P Global Ratings model could migrate towards increased use of reserve protection reinsurance, nat cat tail covers or overall quota share relief, analysts at reinsurance brokerage  Gallagher Re have suggested.

Negative impact from the new criteria may be focused on carriers with a narrow product profile, especially in longer-tailed casualty lines, or in lines with major catastrophe exposure.

For the liability carriers with large reserve books, Gallagher Re expects a shift into adverse development covers (ADCs) or loss portfolio transfers (LPTs).

For the property carriers with large cat exposures, additional tail covers “could provide the necessary capital relief,” Gallagher Re said.

Across the full spectrum of affected carriers, quota share deals can enhance model scores by their outright reduction of premium and reserve exposure amounts, analysts added.

S&P, which published its final revision November 20 after a multi-year process of consultations, stated that 30% of companies will have their capital scores impacted by the new criteria, while only 10% of companies will incur a rating change, of which most will be positive.

Amongst the changes, S&P rejigged capital tolerances for debt and hybrid capital with kick-on effects for Bermudians where S&P has a major ratings gap between the financial stability ratings of carriers and the issuer credit ratings of carriers and their parent holdings, resulting from the flexibility that Bermuda authorities show in allowing transfers within capital groups.

“This could make reinsurance a more attractive source of capital than hybrid capital financing” in future capital management decisions, Gallagher Re analysts added.