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Outlook remains negative as returns fall short, per S&P Global Ratings

The global reinsurance sector has generated weak underwriting results in the past four years (2017-2020), and 2021 is shaping up to be another below-par year, says S&P Global Ratings (S&P).

The industry continues to suffer from higher-frequency and -severity natural catastrophe losses, fuelled by rapid urbanisation and climate change.

In addition, this year is likely to be the fifth in a row in which the top 21 global reinsurers rated by S&P exhaust their annual natural catastrophe budgets. The COVID-19 pandemic has further worsened industry losses, especially among these top reinsurers. Overall, this cohort of reinsurers generated more than 70% of the global net reinsurance premiums written in 2020.


Despite the elevated losses, the industry's capital adequacy has been robust and remains redundant at the 'AA' confidence level, aided by capital raises and financial markets' recovery, says S&P. However, the industry still faces secular challenges and competitive market dynamics, remaining fragmented as it battles the commoditisation of its business. Once a competitive advantage, capital now is viewed as a relatively cheap commodity because of the influx to the sector from nontraditional sources, sustained by dovish monetary policies.

Still, reinsurers have struggled to earn their cost of capital (COC), and 2022 could follow the same trend. As a result, S&P says it maintains its negative outlook on the global reinsurance sector. “This outlook reflects our expectations of credit trends over the next 12 months, including the distribution of rating outlooks, existing sector-wide risks, and emerging risks. As of 25 October 2021, 29% of ratings on the top 21 global reinsurers were assigned negative outlooks, 62% were assigned stable outlooks, and 9% were assigned positive outlooks,” said the global credit rating agency.


Many reinsurers have adopted a hybrid model, writing both reinsurance and specialty insurance to hedge against the challenges of the reinsurance sector. Indeed, an increasing number of the top 21 global reinsurers are expanding their insurance more than their reinsurance business, taking advantage of better pricing on the primary commercial side while aiming to reduce volatility.

S&P believes reinsurance pricing momentum will firmly support premium rate increases during 2022 renewals, given the sector's recent underperformance, although the pace of rate increases may slow, in part due to ample capacity. While capital is not in short supply, reinsurers overall have shown discipline in capacity deployment so far, leveraging their alternative capital vehicles to manage their peak natural catastrophe zone exposures.

Reinsurers also continue to push for higher premium rates wherever they can take them in property/casualty (P&C) lines, with terms and conditions remaining in sharp focus, especially for the exclusion of pandemic and silent cyber coverage.

However, reinsurers are only price-takers in this insurance cycle, since this time the primary market is leading pricing dynamics. While the recovery of economic and social activity has generated optimism, reinsurers remain cautious about reserve adequacy in view of casualty loss trends for business written during the recent soft cycle, as well as given inflationary pressures, potential COVID-19 loss developments, climate change, and the risks of investing in uncertain times.

Navigating uncharted waters

Reinsurers are navigating uncharted waters with uncertainty galore on both sides of the balance sheet. While reinsurers are price-takers in this insurance cycle, the winners will be those that combine underwriting discipline with innovative risk solutions while enhancing their value proposition to cedents and insureds. S&P said, “Our negative outlook could improve if we come to believe the sector may earn its COC, but we don't expect this will happen before 2022, at the earliest.”

The top 21 global reinsurers referred to are Alleghany, Arch, Ascot, Aspen, AXIS, China Re, Everest Re, Fairfax, Fidelis, Hannover Re, Hiscox, Lancashire, Lloyd’s, Markel, Munich Re, PartnerRe, Qatar Insurance, RenaissanceRe, SCOR, Sirius, and Swiss Re.



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