Moody’s Ratings on Wednesday (4 Sep) upgraded its outlook for the global reinsurance market to positive, citing improved profitability that follows a better risk/return balance and higher investment income.
In its assessment, Moody’s said that “higher prices and tighter policy terms, supported by favourable risk/return dynamics, and healthy investment income,” support the outlook.
The rating agency noted that the underwriting profitability of the reinsurance sector has steadily improved over the last five years, mainly following price increases and the reduction of underwriting risk, which were the result of a surge in claims.
Unlike previous cycles, rising prices have not led to more rivalry between new players and alternative sources of funding, Moody’s added.
The ratings agency also mentioned that capital inflows have been subdued and reinsurers have benefited from reduced exposure to frequent small-scale disasters, further supporting profitability.
However, Moody noted that, despite casualty prices going up, reserves are still a concern – particularly for long-tail US casualty exposures, which have been unfavourable due to increased litigation and higher jury awards. “Reinsurers are likely to add to their reserves to counteract this. While casualty prices are rising, the improvement has been counterbalanced by higher claims, leaving profitability largely flat.”
Moody’s rating assessment also notes that extreme weather will remain a critical concern for the reinsurance industry. In recent years, stronger pricing and growth in underlying exposures have increased reinsurers’ exposure to high-severity natural catastrophe risk.
“The frequency and severity of catastrophe events over the coming year and their impact on reinsurers’ profits will have a significant bearing on the sector’s ability to push for further price increases in 2024 and beyond. If catastrophe activity is light over the next 12-18 months, reinsurers may not be able to keep prices at current high levels,” Moody’s said.
Brandan Holmes
VP and Senior Credit Officer at Moody’s RatingsWhen it comes to balance sheet strength, Moody’s says said that reinsurers are mostly well-capitalised and have only moderate asset risk, limiting their exposure to financial market volatility.
“Companies have been striking a balance between deploying excess capital into the business and returning it to shareholders,” Moody’s said in its outlook commentary, adding that it expects reinsurers to retain some buffers above target capital ratios, in part to offset the impact of declining interest rates, although investor expectations of rising capital returns will be an obstacle.
Speaking on the outlook shift, Brandan Holmes, VP and Senior Credit Officer at Moody’s Ratings, commented “With only limited new capital entering the market, this will drive continued strong profitability over the next year, assuming no large catastrophes.”
“Solid balance sheets will help reinsurers withstand potentially high catastrophe losses and adverse casualty reserve development,” Holmes concludes.
