Insurers leaning on cheap reinsurance could face downgrades
Insurers that rely on cheap reinsurance backed by inadequate underwriting standards to support growth could face being downgraded, Standard & Poor's (S&P) has warned.
In a report called Lessons From Large US Cedants In The Game Of Reinsurance Arbitrage, the rating agency examines differences in the reinsurance strategies being used by large US cedants highlight the differing levels of strategic risk-management sophistication and risk tolerances among buyers.
It suggests that, to remain relevant, traditional reinsurers have been behaving increasingly like insurance-linked securities players while large cedants are balancing reinsurance optimisation with top-line growth.
Although cedants' reinsurance strategies differ, the common dominator is that reinsurance optimisation does not translate into underwriting dilution, the report suggests.
“Although it is unlikely, we could take rating actions if we start to see insurers rely on cheaper forms of reinsurance to support excessive growth, poor underwriting standards, or insufficient risk management," said Tracy Dolin, Standard & Poor's credit analyst Tracy Dolin.
