Global reinsurers’ financial strength declines

Financial strength in the global reinsurance sector has declined over the past five years to the point that, when taken on a stand-alone basis, no reinsurer is currently rated higher than ‘AA-,’ according to a recent report published by Standard & Poor’s.
“The downward trend in financial strength has coincided with a withdrawal from reinsurance business by broadly based insurance groups AXA and General Electric most recently,” according to a S&P’s press release announcing the report.
“Both these changes can be attributed to the earnings underperformance and volatility of the reinsurance industry, which in turn are driven by the higher industry risk factors that are features of the reinsurance market in general and the property/casualty reinsurance market in particular,” S&P’s credit analyst Simon Marshall says.
The report considers the impact of each of these risk factors, including low client loyalty, a lack of correlation between financial strength and pricing power, and low barriers to entry (resulting in price cyclicality).
“It seems that industry risk is set to remain high for property/casualty reinsurance, driven by issues that are unlikely to improve materially in the years to come,” S&P’s credit analyst Laline Carvalho says.
The report does, however, see some mitigating factors emerging, of which the most significant is the improvement in enterprise risk management. “This is particularly the case in Europe, where the introduction of Solvency II means, in effect, that sound risk management will be rewarded with lower regulatory capital requirements,” S&P’s says.