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19 June 2014News

Moody’s downgrades reinsurance outlook to negative

Moody’s has lowered its outlook on the global reinsurance sector to negative, citing an oversupply of capacity and low interest rates.

The rating agency also names more substitute products, new entrants in the form of non-traditional capital, and greater bargaining power of buyers as reasons for the downgrade.

Moody's expects reinsurers to be pressured over the next 12 to 18 months as low interest rates and the pursuit of uncorrelated investments have led investors to put tens of billions of dollars into reinsurance risks. This is effectively introducing a low-cost provider that is trying to assert cost leadership in more and more areas of the reinsurance market.

“This non-traditional capital has already displaced a portion of traditional capacity from the catastrophe reinsurance segment, which holds high strategic stakes for many reinsurers. Catastrophe reinsurance drives industry results in big-loss years and no-loss years, dictates reinsurers' capital needs and capital structures, and subsidises less profitable product lines,” says the report.

It also says that the current soft market demonstrates many of the traits of the late 1990’s, including an overabundance of capital, double-digit annual price declines, a substantial rise in buyers' bargaining power, and predictions of industry consolidation. The rating agency adds however that today’s market is not identical.

"One key difference is that reinsurance buyers today have greater incentives to improve capital efficiency, limiting their need for reinsurance." says Kevin Lee, senior credit officer at Moody’s. "Tighter regulatory oversight and the need for better internal governance have pushed insurers to get more mileage out of their capital.”

The agency says that to remain competitive and still earn their cost of capital, reinsurers are deploying various defensive strategies which are credit neutral at best.

Lee concludes, “We believe reinsurers that are best positioned to cope with the sector's challenges are those that have already demonstrated their strategic relevance to clients and possess relevant size, superior claims service, whole-account capabilities, and a solid insurance platform."