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S&P warns reinsurers against complacency

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S&P Global Ratings says a firming market has given reinsurers “breathing room” but the commoditisation of their business and the rise of alternative capital “nibbling” at their margins presents challenges.

“For now, reinsurers are optimistic about the pricing environment, but a long road to ensure continued relevance lies ahead,” S&P says.

The ratings agency’s 2020 Reinsurance Sector Outlook suggests reinsurers may need to “take a page from the playbook” of other disrupted industries to stay relevant and become more innovative.

The report questions whether reinsurers are complacent in their centuries-old industry and stuck in old ways of doing business.

“Are reinsurers sitting on their hands awaiting external forces of change, or are they self-critical enough to initiate change from within? These are some of the seminal questions that reinsurers need to tackle in the years to come,” it says.

S&P says robust capitalisation, sophisticated risk management practices and rational underwriting continue to underpin its “stable” outlook for the sector.

The ratings company has revised its earnings forecast for the sector slightly upward for this year and next following hardening reinsurance prices, with an expected combined ratio of 95-98% and a return on equity of 7-9%.

But it warns competitive trends haven’t abated even after back-to-back record catastrophe years in 2017 and 2018.

Modest reinsurance rate increases at the start of the year have picked up steam with larger gains at the mid-year renewals and tightening terms and conditions.

S&P says the momentum is expected to continue, but it characterises the pricing environment as a “firming” market rather than a hardening one.

Global aggregate rate increases up to mid-single digits are expected over the next 12 months, assuming an average catastrophe year, it says.