Despite huge losses from catastrophes last year reinsurers began 2012 in solid shape, but the companies benefited from factors that might not be present going forward—and the industry will require renewed focus on underwriting, ratings agencies say.

Moody's Investors Service notes that in years when the reinsurance market has suffered considerable losses, it has shown the capacity to rebuild capital faster than other financial institutions. As an example, Moody's points out that reinsurers began 2012 with more capital than they had at the start of 2011.

For the future, however, ratings agency A.M. Best says that “underwriting is likely to remain the most critical component of earnings” for reinsurers.

In 2011, the top 50 global reinsurers produced an underwriting loss for the year but still managed to make a small profit through a combination of net investment income and modest capital gains, A.M. Best notes.

That performance was not spread evenly across the board, Best says, observing that European reinsurers have a broader capital base and diversification in business. Bermuda insurers, by contrast, are primarily invested in the P&C market and are subject to “a larger share of shock losses.”

The industry also benefited from reserve releases built up during the hard market of 2002-2006, says Best.

“Expectation is building that this degree of favorable reserve development will not hold up,” the ratings agency warns, adding that “pressure will increase on underwriting margins to generate earnings as long as investment yields remain lackluster.”

Moody's notes that reinsurers learned valuable lessons from 2011 and are tightening up underwriting and instituting better risk-management safeguards. However, hardening in some lines may trail off in 2013 due to ample capacity.

“A large disaster, faltering primary rates or worsening of the global economy could still derail our view,” says Moody's.

Both A.M. Best and Moody's rate the reinsurance industry as stable. “The stable outlook acknowledges the industry's resilience, improvements in underwriting and risk management, a possible pickup in demand due to impending regulations and hardening in some primary insurance markets,” says Moody's.

A.M. Best says the segment “is being held stable, supported by continued strong risk-adjusted capitalization, prudent enterprise risk management and an improving pricing environment across a broadening spectrum of business classes.”

Special Reports /

Reinsurers in Good Shape, but Need Added Focus on Underwriting

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