The outlook of the global reinsurance industry has been upgraded from negative to stable by S&P Global Ratings (S&P) — a shift from the negative stance held since May 2020 due to the far-reaching impacts of COVID-19.
In a new report, S&P said that structural adjustments during the 2023 reinsurance renewals, such as extensive amendments to underwriting, which includes tighter terms and conditions (T&C) and the repricing of risk, largely contributed to this positive shift.
S&P highlighted the pressures the reinsurance industry has faced and will continue to face, including economic uncertainties such as high inflation rates, the COVID-19 pandemic, geopolitical crises such as the Russia-Ukraine conflict, and natural catastrophes (nat cats).
Nevertheless, it emphasised the potential of recent changes within the industry to mitigate the increasing risks, including those associated with the escalating frequency and severity of nat cats, as the reason why it has upgraded the outlook for the industry.
Brighter skies ahead
One immediate cause for optimism is reinsurance pricing, which has seen the hardest market conditions in short-tail lines for decades.
Enhanced underwriting initiatives, such as elevated attachment points, stricter T&C, and reduced aggregate covers, and increased net investment income, have instilled confidence in the sector’s capacity to deal with still-plentiful obstacles over the next two years.
Despite sector-wide risks, most of the top 20 global reinsurers (90%) have stable rating outlooks, 5% have positive rating outlooks, and the final 5% have negative outlooks. S&P said these figures are indicative of the anticipated credit trends within the sector over the next 12 months.
Meanwhile, underwriting results have demonstrated noticeable improvement. The combined ratio of the leading 20 reinsurers was 96.0% in 2022, marking a solid increase from the five-year average of 99.7%. This upward trend has improved further into the first half of 2023, with ratios lying between the mid-80s and low 90s.
S&P said, “The improving results have come in response to changes in reinsurers’ strategies, increases in pricing, and tighter T&C”. It also noted that reinsurers have shown prudent restraint in their operations, particularly by removing certain high-risk contracts, such as aggregate covers, leading primary insurers to retain higher levels of risk.
Catastrophe remains a puzzle to unlock
Property catastrophe continues to be a dilemma for the industry, with S&P stating that, “some reinsurers see pricing adequacy within the property catastrophe segment as a profitable opportunity, while for others it’s a stark reminder of the inadequate returns of the past several years.” It added that “some reinsurers have grown their natural catastrophe exposure, while others have reduced it or even completely exited the property catastrophe business.”
To combat the ebb and flow of the market environment, S&P said that reinsurers have generally been broadening their reach with hybrid business models, diversifying into primary specialty insurance sectors like U.S. surplus lines, allowing them to diversify their portfolio and reduce volatility.
In terms of future outlook, S&P predicted — despite contrasting strategies amongst reinsurers concerning property catastrophe segments — the reinsurance sector will showcase better results with a combined ratio between 92%-96% and an ROE ranging from 9%-12% in the 2023-2024 period.
