Global reinsurance outlook grim: S&P

A negative outlook persists for the global reinsurance industry, says rating agency Standard & Poor’s. In it’s “Global Reinsurance Outlook”, S&P notes that despite rising premiums, long-tail losses, investment declines and the decision by some companies to exit reinsurance continue to cast a pall on the industry.
S&P has 12 of the top 25 reinsurers on credit watch or a negative outlook, with 47 companies downgraded since the beginning of 2002. S&P expects downgrades will continue to outpace upgrades in 2003.
Along with price increases, reinsurers have tightened terms, including higher attachment points (high risk retention by the reinsured), exclusions, and limits on liability lines in proportional business. New capital has flowed into the industry to the tune of US$20 billion.
However, this capital has been put in many cases into start-ups in the Bermuda market rather than existing players.
There have been some industry IPOs Montpelier Re, Platinum Re and St. Paul’s reinsurance operation however, the ability of reinsurers to access capital markets is stymied by low investment yields and volatility in the capital markets wreaking havoc on reinsurer results. There have been mixed reactions to reinsurer attempts to raise investor capital.
But perhaps the most visible thorn in the industry side have been huge reserve charges taken by a number of companies to deal with prior year losses, largely related to U.S. liability lines. S&P points to directors and officers (D&O) liability as a future problem area for the industry, as well as the persistence of the asbestos liability issue. “So far, the pain of asbestos-related claims has been felt most in the primary market, but this will have a knock-on effect on reinsurers in due course,” the report notes.
“The established global groups are being hit from a variety of directions. As well as the adverse development that is occurring on their long-tail exposures, the benefit of the price increases in these lines will take longer to work through, because internal and external actuaries will take a pessimistic view of claims development in 2002, due to the reserve development on prior years.”
S&P expects the overall industry combined ratio to drop to 106% for the 2002 loss year, but as much as 10 percentage points could be added to this based on prior year losses.
The rating agency advises reinsurance needs to be viewed as a risk management tool, rather than a source of capital. Current pricing and terms need to be maintained if the industry’s outlook is to improve.