S&P Says Reinsurers Should Lower Exposures
NU Online News Service, June 1, 3:52 p.m. EDT?Reinsurers seeking to avoid the mistakes they made the last time prices fell should take steps to reduce their level of exposures, a ratings agency recommended. [@@]
Stephen Searby, an analyst at Standard & Poor's Ratings Services, said as reinsurance premium rates continue to fall across a number of lines, "if everybody goes on writing the same amounts of business in the face of falling prices, obviously mathematically it means your exposures are rising."
Mr. Searby is a co-author of the S&P "Global Reinsurance Report Card" study that was released today.
The message his firm is trying to send out to reinsurance companies, Mr. Searby said, is that in order to avoid problems that reinsurers had during the last soft cycle?which effectively lasted from 1997 to 2001?they need to reduce their exposures.
Mr. Searby observed that some reinsurers have already publicly indicated that they will reduce their level of exposure to those lines of business that have already peaked, for example, in global property-catastrophe, aviation hull and big-ticket U.S. property risks.
"I am sure you've seen the trend already. We are seeing a dual or even a multi-speed cycle here, where property?certainly the big-ticket property?and the aviation have already peaked. And property-catastrophe has already peaked," he noted.
But even as reinsurers try to lower their level of exposure in the current environment, results are likely to vary between companies, Mr. Searby noted, depending on the sophistication and accuracy of price-monitoring tools as well as the management's ability to resist pressure to maintain current underwriting volumes.
Mr. Searby also forecast that the underlying price decline?combined with reductions in exposures by reinsurers actively managing the cycle?will likely result in a material decline in premium volumes over the next few years. But the prospect of such a fall in premium volumes generally shouldn't be a concern for investors, Mr. Searby assured, if it stems from reinsurers' sensible risk-management policy.
S&P also added in its report that the exposure cuts may create increases in risk-adjusted capital and the potential return of excess capital to shareholders. Meanwhile, as premiums shrink, expense management will become a more important part of the performance equation, according to the New York-based ratings agency.
"Standard & Poor's will therefore be monitoring reinsurers' ability to trim overheads, and a flexible business model will consequently remain a considerable advantage over the coming months," Mr. Searby said.
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