Rating agencies take a negative view of reinsurance: Demotech

Demotech has accused other rating agencies of taking “a short-sighted, quarterly earnings perspective,” and underestimating the importance of reinsurance programmes when evaluating insurance companies.

Joseph Petrelli, president and co-founder of Demotech, described the use of reinsurance as a “prudent practice,” especially for property insurers with exposure to catastrophes. The quality and quantity of that reinsurance is a critical component of a carrier's enterprise risk management programme and business model, he said.

Other rating agencies, however, “may view this important expenditure negatively and characterise it as a dependency on reinsurance," he warned.

Petrelli praised property insurers that honoured their commitments to policyholders in 2020, despite the record-breaking hurricane season, by relying on their reinsurance programmes.

“Rather than applaud these insurers for having reinsurance programmes that facilitated their ability to pay claims and simultaneously protect their financial stability, other rating agencies seemed to be surprised that insurers could not earn an operating profit while addressing the undue number of claims emerging from the catastrophe events,” he said.