Hannover Re, Swiss Re, SCOR most at risk in prolonged soft market

Some of the world’s biggest reinsurers will be hardest hit by a prolonged soft market if an analysis of ratio of reserves to premiums is conducted, according to analysts at CreditSights.

The higher the ratio of reserves to premiums, the higher the risk profile of reinsurers in a prolonged soft reinsurance market, the authors explained in a report called ‘Global Ins. R-V: Window Shopping in Monte Carlo,’ published Sept. 28.

The ratio gives an indication of the velocity of the lines of business, the authors explained. By comparing the reserves to premiums, the analysts calculated a simplified average duration of the reinsurers’ lines of business. The higher the ratio, the longer the duration of the lines of businesses.

If a reinsurer underwrites a relatively long tail risk such as casualty, then it is likely to be riskier in a low interest rate environment, given the longer duration of its investment portfolio, and it will likely have to reassess its reserves.

The latter point derives from the fact that the initial assumptions in terms of return on investment and inflation would likely have to be reassessed over time and may differ considerably from inception of risk, the authors explained.

The authors do, for example, not believe that it is likely that a casualty policy priced in 2012 would have foreseen the extent of the decline in yields and perhaps more importantly, the persistency of the low rate environment.

Using this metric, Hannover Re appears most at risk with a ratio of property/casualty reserves to premiums of 2.83 percent in 2015, followed by Swiss Re with 2.49 percent and SCOR with 2.46 percent. Munich Re had a ratio of 2.26 percent in 2015. Under this metric, PartnerRe and Everest Re present modestly lower risk profiles than their European counterparts, according to CreditSights.

After being approached by Intelligent Insurer to comment on the matter, Swiss Re issued the following statement: Significant reserves have been released over the last decade, as claims in aggregate have been lower than expected at pricing. Lower inflation has been a significant factor and Swiss Re reports under US GAAP, which requires best-estimate reserving, i.e. no artificial buffers can be built in. Avoiding artificially high reserve buffers allows for a timely recognition of profits thereby providing transparency to stakeholders.

SCOR and Hannover Re did not want to comment.

Experts believe that the soft market in property/casualty is likely to go on for longer. Coupled with a historically low interest rate environment, reinsurers are likely to continue struggling to generate similar returns as in the past. S&P, for example, believes that “due to excess of capital, as long as prices do not increase, reinsurers are living on borrowed time with losses inevitable.”

The trend of sizable reserve releases, particularly in Europe, may not be sustainable in the medium-to-long term, according to CreditSights. Rating agencies have a negative outlook on the reinsurance sector.