Reinsurer returns still insufficient relative to risks: Moody’s
By Matt Sheehan
Despite reinsurance pricing having built much upward momentum over the course of the year, analysts at Moody’s remain adamant that the sector’s returns are still insufficient relative to risk.
Speaking at a briefing alongside the release of Moody’s Global Reinsurance Outlook report, Vice President James Eck maintained that “much more rate is needed” to offset the challenges currently faced by the industry.
His comments came as Moody’s changed its outlook on the global reinsurance sector to negative from stable, largely due to coronavirus-related losses and other catastrophe events in 2020.
The rating agency also pointed to low interest rates, social inflation and higher retro costs as a drag on reinsurer profitability, as well as the impact of climate change, which could lead to an increase in the frequency of catastrophe events.
Offsetting these factors is the continued strength of capital in the sector and the hardening price environment, which has been helped in recent months by a lapse in the growth of alternative capital.
But Moody’s has concerns about how companies will go about re-underwriting their exposures and attempt to achieve profitability in an environment where investment income is likely to remain low.
“We realize that reinsurance is a volatile sector, you’re going to have good years and bad years,” said Eck. “But the good years seem to be getting less good, and the bad years are just as bad. Over the past five years we had 2017 which wasn’t good, 2018 wasn’t good, and 2020 is not shaping up to be very good either.”
“So just given how low profitability is getting down to, and with catastrophe event frequency increasing to where it is, we just think the returns are insufficient relative to the risk and volatility for the sector.”
While many reinsurers have been quick to celebrate the return to a hardening market cycle, Moody’s notes that rate increases remain well below where they have been in the past, and suggests that the profitability of the sector has deteriorated significantly over the last decade.
“Pricing has been pretty strong and if you listen to some of the earnings calls, a lot of the companies are pretty optimistic about where things are,” Eck acknowledged.
“But if you take a step back and look at where the pricing has come from, you can see we still have a ways to go and property cat is still below where it was back in 2012. So this just gives us a longer term view that a lot more rate is needed to get the sector back to be able to earn the type of returns that it has in the past.”
That said, Moody’s grants that pricing gains are becoming more broad-based, with improved terms and conditions and lower ceding commissions across the board, and momentum likely to continue throughout next year.
A recent reinsurance buyer survey by Moody’s found that over 90% of primary insurers are expecting reinsurance price increases going into the January renewals.
This marks the first year that no insurers said they were expecting price declines, and compares to 2016, when 65% said they were expecting pricing to go down.