Global reinsurance market to see consolidation, product & service innovation:S&P

S&P Global Ratings believes that these factors will continue to push the sector to evolve, forcing market consolidation, product and service innovation, expansion of product offerings, and reimagining of the re/insurance value chain. Indeed the market may look different, but it could be a long time before the competitive landscape changes.

 

New York:

S&P Global Ratings has kept its stable outlook on the global reinsurance sector and on the majority of the reinsurers it rates.

 

This assessment is mostly based on reinsurers' still-robust capital adequacy and relatively disciplined underwriting, at least so far, supported by well-developed ERM, and an overall improving reinsurance pricing environment. On the other hand, the fundamental secular competitive trends haven't abated, even after back-to-back record catastrophe years in 2017 and 2018, said S&P in its report ``2020 Reinsurance Sector Outlook: Secular Headwinds Continue Despite Positive Pricing Momentum''.

 

In addition, reinsurance pricing has been hardening through the 2019 renewals and reinsurers' optimism for the upcoming renewals in 2020 should help the sector broadly earn its COC in 2019 and 2020, assuming average catastrophe years, said the international rating agency.

 

This expected improvement in the sector's return on capital (ROC) relative to its COC is one of the key factors behind our decision to maintain our stable outlook on the global reinsurance sector, despite the disappointing recent track record.

 

S&P Global Ratings believes that these factors will continue to push the sector to evolve, forcing market consolidation, product and service innovation, expansion of product offerings, and reimagining of the re/insurance value chain. Indeed the market may look different, but it could be a long time before the competitive landscape changes.

 

For now, reinsurers are optimistic about the pricing environment, but a long road to ensure continued relevance lies ahead.

 

Although the current environment gives reinsurers some breathing room, the underlying factors spurring secular changes within the sector remain intact. Despite the losses and disciplined stance, there isn't a scarcity of capacity--neither of traditional nor of alternative capital. Product commoditization will advance, especially within the property-catastrophe market, centralization and optimization of reinsurance purchasing will continue, consolidation of brokers will further entrench the intermediaries, and growth opportunities remain limited except for a few pockets. Despite M&A activity in the past few years, the global P/C reinsurance market remains very fragmented and highly competitive.

 

After years of reinsurers battling pricing declines and losing ground to alternative capital at least within the property-catastrophe space, the events of the past two years have shifted the sentiment, placing reinsurers in a slightly better position. Reinsurers are finally gaining on pricing, and terms and conditions, with the capital demand-supply equation fairly balanced.

 

Alternative capital, which includes collateralized reinsurance funds, insurance-linked securities (ILS), sidecars, and industry loss warranties, has become an integral part of the property-catastrophe market. According to Swiss Re latest estimates, it represented about 25% of total property-catastrophe risk supply in 2018 and accounted for 25%-30% of the insured losses from the 2017 North Atlantic hurricane season.

 

Based on Aon, alternative capital declined 4% or $4 billion to $93 billion in first-quarter 2019 relative to year-end 2019. The decline was mostly caused by dismal returns in the past couple of years, loss payments, and loss creep from earlier events, exacerbated by governance issues at certain funds, which triggered investors' redemptions. The $93 billion of assets under management includes about $15 billion of collateral still trapped because of recent natural catastrophe events.

 

This has caused a flight to quality, as investors have become more selective and have shifted their attention to well-established sponsors/managers with a better track record while simultaneously asking for higher returns. Indeed, in December 2018, 

 


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