S&P: Reinsurance Sector Challenged, but Outlook Still Stable

NU Online News Service, Jan. 25, 2:35 p.m. EST

Although the global reinsurance industry is coming off a year of near-record-level catastrophes and faces challenges in the coming year, Standard & Poor's says it is maintaining a stable outlook on the sector due to surplus capital and strong enterprise risk management capabilities. 

In a ratings update, S&P says it is raising its combined-ratio estimate for the reinsurance sector to between 110 and 115, up from between 105 and 110. The ratings agency adds that “many companies could fail to meet our earnings expectations” for the year. 

Furthermore, the ratings agency notes that reserve releases that have supported the sector's earnings in recent years are likely unsustainable, and future earnings will be limited by low-interest rates and a relatively weak macroeconomic environment. While the sector has seen some rate increases, Moody's notes that they have not been enough “to declare that we are in a 'hard market,' characterized by high-premium rates and tight terms and conditions.”

Despite these headwinds, S&P says, “We consider that the sector still holds surplus capital, although the amount has fallen from its peak a year ago.”

But S&P notes that wile the sector as a whole has excess capital, “individual companies vary widely in their capital levels.”

S&P also says that the sector's ERM strategies are “strong relative to the rest of the insurance industry,” which has helped keep insurance and investment losses within risk tolerances for the most part. 

The ratings agency says it does not expect ratings actions for the sector over the coming year, either up or down. But S&P adds that should the industry fail to generate sufficient profitability or if a major shock to industry capital occurs, the view on the reinsurance sector could be revised.