Global reinsurers may see financial strength ratings come under pressure as competition driven by declining rates and overcapacity could challenge reinsurers’ earnings, according to a report Thursday from Standard & Poor’s Corp.
“Continuing competitive pressure, reduced earnings potential, and increased industry risk in some segments of the market could cause more outlooks to turn negative,” Standard & Poor’s said in its preview report, “Tough Competition Could Put Ratings on Global Reinsurers Under Pressure,” released ahead of its annual “Global Reinsurance Highlights” publication that will coincide with the 2014 reinsurance Rendez-vous de Septembre in Monte Carlo.
For now, however, the average financial strength rating for the 23 global reinsurers rated by S&P remains at A, said the report. “Many of the 23 global reinsurers that we rate share at least strong capital adequacy, strong competitive positions, and strong (enterprise risk management) capabilities,” said S&P.
Global reinsurers are also responding to market pressures in different ways, having not “succumbed to the temptation to use inadequate pricing to retain market share” and “seeking more-profitable markets, or tweaking their investment strategies toward riskier assets to increase investment returns.”
Larger, well-diversified insurers will weather competition challenges better and will also benefit from cedents’ streamlining of reinsurance programs to engage fewer reinsurers, which may hit smaller players.
“As a result, smaller and less-diversified reinsurers, especially catastrophe-concentrated players, will feel pressure on their market positions. We could reflect these weaker competitive positions, greater industry risk, and potentially lower earnings in our ratings,” said S&P.
Some smaller companies will turn to partnerships to remain vital, according to S&P.
“So long as the current pressure on premium rates continues, we expect merger and acquisition activity to be high on some companies' agendas, in particular fueled by limited growth opportunities and the need for economies of scale,” said S&P.