Reinsurers’ excess capital cushion rapidly depleting, price increases needed

Global reinsurers have had excessive capital available to absorb the shocks of the past year, but much of that cushion has eroded, likely triggering price increases during the Jan. 1, 2009 renewals, says Standard & Poor’s (S&P’s).
S&P’s predicts an average price increase of between 5% and 10%, according to its report, ‘Global Reinsurance: Excess Capital Absorbs the Shock to Date; But There is Limited Further Margin for Error.’
S&P’s estimated that at the beginning of 2008, on an economic basis, the Top 9 global reinsurers held a total of US$25.4 billion worth of excess capital.
“Hence, more than 85% of the excess capital available to these entities at the beginning of the year has since been eroded, with further significant write-downs expected during the fourth quarter,” the report says.
Although the comparison ignores the impact of other operating earnings during the year, and nearly all of the investment write-downs remain unrealized, “the sector has been subjected to, and successfully withstood, a ‘AAA’ stress during 2008, its capital cushion has been substantially depleted and it will need to be rebuilt to maintain current rating levels,” the report says.
Anything less than a 5-10% rate increase could raise doubts about the industry’s ability to generate sufficient earnings over the next 12 to 24 months to the extent necessary to compensate for the loss of financial flexibility, S&P’s warned.
Lesser price increases could cause S&P’s to change its outlook on the sector to negative or assign negative ratings to those reinsurers that S&P’s believes to be thinly capitalized.