S&P maintains stable outlook on reinsurance sector

Standard & Poor’s is maintaining its stable outlook on the global reinsurance sector, but explains that some downgrades may be in the offing this year, while upgrades will be rare.
S&P says reinsurers performed well in 2004 generally, despite catastrophe losses related to U.S. hurricanes and Japanese typhoons, with pricing declines more moderate than expected and improved risk-based capitalization.
Many questions linger in 2005, however, including the determination of the industry to maintain pricing discipline, the impact of adverse reserve development and the industry-wide investigations sparked by New York Attorney General Eliot Spitzer.
Particularly key to the sector’s outlook is maintenance of price discipline, as well as discipline in terms and conditions. “The crucial issue is whether the discipline shown in the January 2005 renewals is built on sand or on the solid foundations of a more sophisticated approach to analyzing the risk-return relationship,” says S&P analyst Stephen Searby. “Financial strength remains dependent on whether further declines in premium prices can be halted by the beginning of 2006 when prices, based on current trends, look set to begin testing economic levels.” Also of note will be the handling of storm-afflicted Florida accounts on July 1 renewal, S&P says.
Several significant reserve announcements were made by reinsurers last year, and while these largely related to loss years prior to 2002, S&P notes, “many U.S.-domiciled reinsurers reported adverse development for the 2002 accident year, and while that remains a profitable year, the initial overestimation of profits by some reinsurers is concerning”.
S&P also comments on the “unwelcome spotlight” the industry faces as a result of investigations into finite reinsurance and broker compensation. “While the short-term fallout is likely to be limited, the falling demand for finite reinsurance could hurt revenue lines for some key reinsurance providers,” S&P says of the willingness for global parents and shareholders to direct capital to U.S. reinsurers. At the same time, their European counterparts face increased regulatory cost and capital standards as a result of new regulatory standards.