S&P’s global reinsurance outlook is negative, but improvement is possible

The global reinsurance sector is expected to feel continued pressure due to several headwinds, according to a new report from S&P Global Ratings, but a predicted increase in underwriting profitability might also be the catalyst for a much-needed turnaround.

S&P has given the sector a negative outlook due to the “endless barrage of headwinds” experienced in the last few years, reflecting expectations of credit trends over the next 12 months, including the distribution of rating outlooks, as well as existing and emerging risks. As of August 31, 19% of ratings on the top 21 global reinsurers were on CreditWatch with negative outlooks, the report noted, while 76% had stable outlooks and only 5% were positive.

The analysts who authored the report pointed to the combined impact of natural catastrophe losses, high inflation, capital market volatility, and increasing cost of capital as the biggest hurdles for reinsurers in 2022 and 2023.

Amid these headwinds, persistent pricing improvements across multiple lines this year signal the possibility of a turnaround, especially with underwriting profitability in both property/casualty and life reinsurance expected to improve for 2022-2023.

According to the report, elevated losses from natural catastrophes and pandemic losses have affected reinsurers’ performance, while sparking pricing increases over the past years. This trend is expected to carry on into the 2023 renewals.

“Reinsurers’ strategies diverge on natural catastrophe risk, and we believe alternative capital will remain an important pillar in the reinsurance space,” said S&P analysts.

Moreover, with market-to-market losses expected to erode capital buffers in 2022, the global reinsurance sector’s capital adequacy could be sustained by improving underwriting earnings, increasing investment income, prudent capital management, and sophisticated levels of risk management.

“We believe fundamental, disciplined underwriting and adequate risk pricing, tighter terms and conditions with clear exclusions, and overall sophisticated risk management are key if reinsurers are to defend their competitive position and preserve earnings and capital strength,” said the analysts.