Ratings agency is more optimistic about the reinsurance sector

Ratings agency S&P has reversed a three-year-old stance on the reinsurance industry, upgrading its view  from negative to stable.

The outlook is based on an analysis of the top 20 global reinsurers, 14 of which are either based in Bermuda or have substantial Bermuda operations.

S&P director Ali Karakuyu said the revision was due to “much needed structural changes in reinsurance underwriting, including tighter terms and conditions and repricing of risk during the 2023 renewals”.

Saying the price increases were “hard earned”, he added: “We have changed our view of the global reinsurance sector to stable from negative because we expect it will earn back its cost of capital this year and next year based on favourable property casualty pricing conditions, pre-pandemic earnings levels in life insurance and increasing net investment income.”

Karakuyu said S&P expected rates to increase in 2024 and that increases were still needed in the casualty segment.

But he warned that there were still threats to the sector, including elevated natural disasters, increasing cost of capital, financial volatility and inflation risk.

While property premiums had seen increases, “more needs to be put in place in terms of rate rises, especially due to social inflation” for casualty.

Asked why no “Class of 23” of newly capitalised reinsurers had emerged with the hard market, Karakuyu said “the story is different” from previous hard markets such as the 2006 class which followed Hurricane Katrina and had been caused by a lack of capacity.

In 2023, he said: “Investors were quite aware that the rate rises that were taking place in recent times were really needed as opposed to a capacity shortage. The story is different.

“Also keep in mind investors are deciding on whether to put money into the sector they are also weighing it against what else is out there, so they have also got other opportunities.”

S&P associate director Maren Josefs noted there remains uncertainty around climate change and Karakuyu said reinsurers were putting in new reinsurance arrangements such as stop loss policies which supplanted the need for new capital to some degree.

He added that while reinsurers had built inflation into their budgets, there remained a key risk of “unexpected inflation”, which he said could be “quite challenging” for reinsurers.

S&P has calculated that the net combined ratio of the top 20 reinsurers was 96% in 2022, down from the high of 104.8 in 2020 – the third consecutive year of underwriting losses – and was projected to be between 92% and 96% in 2023 and 2024.

Karakuyu said 2022 had been the fifth most expensive year for insured losses from global natural disasters with $132 billion in claims. This was 57% above the 21st century average. He noted that the last six years had all been above the average of $83 billion.

However, property catastrophe rates had risen by 27.5% according to a Guy Carpenter index and were at a multi-decade high.

“Reinsurers have also tightened policy wording for exclusions for certain risks (such as cyber, war and terrorism), raised their attachment point, scaled down limits and offered meaningfully less capacity to lower layers and aggregate covers,” he said.