S&P: insurance rates stabilise; reinsurance risks continue
The rise in interest rates has led to stabilised ratings for insurers in the US, but risks for reinsurers continue to heighten.
According to Standard and Poor’s’ (S&P) latest report: Downside Pressure Eases Mid-2014 For Most Global Insurance Key Risks, ratings stability is more evident compared with a year ago, as eurozone sovereign outlooks resolve and greater capital and earnings certainty is expected.
"Nevertheless, reinsurance sector risks have heightened after a long period of stability, as we expect earlier soft market- pricing conditions to continue into the June/July renewal season," said credit analyst Michael Vine.
"Regulatory uncertainty around the impact of global systemically important insurers, Solvency II, and business conduct regulation, amongst others, continues to pose strategic and operational challenge."
According to the report, around 81 percent of Standard & Poor's Ratings Services' ratings on insurers globally had a stable outlook at the start of May 2014, compared with about 73 percent at the start of 2013, which indicates that insurance ratings are expected to be largely resilient to the risk environment outlook.
“Outlook drivers are biased toward capital and earnings expectations, the influence of sovereign rating outlooks, and, to a lesser extent, merger and acquisition activity and expected changes in competitive position metrics,” said the report.
Regional variation is still evident with negative indicators at 10 percent (negative bias 3 percent) for insurers in North America.
Western Europe comes in at 11 percent (positive bias 1 percent), on the back of greater economic and sovereign stability, and 7 percent (neutral bias) is Asia-Pacific's negative rate, with solid growth fundamentals offset by capital and earnings pressure in some markets and the Japan sovereign negative outlook.
A higher negative rate is in Central and Eastern Europe, the Middle East, and Africa (CEEMEA), at 20 percent (negative bias 12 percent), largely from sovereign constraints; Latin America's is 19 percent (negative bias 13 percent).
The report also discusses the impacts of interest rates remaining at low levels in key markets, global, the risk of soft pricing to global reinsurers and the strategic and operational challenges created by regulatory uncertainty.