Increased competition, capacity putting pressure on global reinsurers: S&P

Increased competition and third-party capital, along with declining premiums, is putting pressure on global insurer’s and could affect their ratings, but many companies are working to mitigate those effects on their business, Standard & Poors says.

Competition in the sector likely to reduce earnings this year and next, putting capital strength at risk, the rating agency says in a preview article online, ahead of publishing its annual Global Reinsurance Highlights publication, which will coincide with the 2014 Reinsurance Rendez-Vous in September. The agency currently provides ratings for 23 global reinsurers.

Increased competition in the sector has caused premiums to decline, S&P suggests. “An influx of third-party capital is fueling excess capacity in the industry, exacerbating the problem,” it notes.

“The knock-on effects could threaten reinsurers’ competitive positions and their ability to maintain their financial strength. We also see heightened potential for volatility in earnings because of weakened pricing.”

However, overall, reinsurers’ risk-based capital adequacy and enterprise risk management (ERM) strategies – which tend to be stronger among global reinsurers than the insurance industry in general – are allowing for an average financial strength rating of “A,” for the sector, S&P notes.

“In general, we have not yet seen material signs that they have succumbed to the temptation to use inadequate pricing to retain market share,” the agency says. “Instead, they are seeking more-profitable markets, or tweaking their investment strategies toward riskier assets to increase investment returns.”

“Some of the stronger, more-diversified reinsurers are slightly reducing their exposure to property catastrophe business where prices have fallen materially,” S&P also suggests.

Smaller reinsurers are also teaming up as consortiums to help their competitive positions, it notes. “That said, ratings on reinsurers remain sensitive to changes in our assessment of their business risk profile and risk position.”