S&P more positive about global reinsurance sector

Rating agency  S&P Global Ratings is taking a cautiously positive view of the global reinsurance sector—albeit with some caveats.

Simon Ashworth, chief analytical officer, insurance ratings at S&P, noted that S&P has revised its sector view on the global reinsurance sector, an overall forward-looking view of credit trends for global reinsurance companies, to stable from negative in early September.

“The main driver was the view that the green shoots in reinsurance underwriting profitability that have emerged are now finally taking root,” he told Intelligent Insurer.

“There’s a much more buoyant view of forward-looking profitability, measured by combined ratio or return on equity, than previously. It’s not an overwhelmingly positive view, because a number of headwinds are still present and could impact profitability.”

He named some of these headwinds as inflation and elevated natural catastrophe losses. But Ashworth said that S&P is predicting that reinsurers will earn their cost of capital over the next couple of years, despite these.

He added the caveat that the industry may not have an overwhelmingly positive story to tell from a profitability perspective, but it is certainly one which has improved.

This improvement, he said, is largely due to much-needed structural changes in reinsurance pricing and terms of conditions, in particular as seen in the 1/1 renewals this year—but the process of change had started well before that.

According to Ashworth, reinsurers have regained pricing power and control over where they deploy their capital. This was, in his view, a natural shift after a number of years of weaker and poor profitability levels. Effectively enough was enough—reinsurers recognised things needed to change, he said.

This sentiment was bolstered by an underlying driver that was somewhat forward-looking: reinsurers also had concerns over the impact of inflation and ongoing extreme weather events.

A different picture

Eunice Tan, head of credit research Asia-Pacific and managing director & sector lead, insurance ratings Asia-Pacific at S&P, said that the view from the region was different from the global picture.

The first difference, she said, was a weaker underwriting performance for Asia-Pacific reinsurers compared with global reinsurers. Combined ratios remain above the 100 percent mark in the region.

“There were a few drivers of this,” she said. “First, the still lingering COVID-19-related losses. Asia-Pacific countries eased COVID-19 restrictions later than their global peers, most notably, China in Q1 2023.”

Tan added that there were domestic and economic challenges coming from China. “There has been a lot of talk around the property sector as well as concerns about the local government, finances, etc.

“These are adding to investment headwinds for Chinese insurers and reinsurers alike. Other regions are also talking about higher interest rates for longer,” she concluded.

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