19 June 2014 News

Moody’s downgrades reinsurance sector to negative

Rating agency Moody’s has lowered its outlook on the global reinsurance sector to negative, citing an oversupply of capacity, new entrants in the form of non-traditional capital, more substitute products, low interest rates, and greater bargaining power of buyers.

Moody's expects reinsurers to be pressured over the next 12 to 18 months as low interest rates and the pursuit of uncorrelated investments have led investors to put tens of billions of dollars into reinsurance risks. This is effectively introducing a low-cost provider that is trying to assert cost leadership in more and more areas of the reinsurance market.

“This non-traditional capital has already displaced a portion of traditional capacity from the catastrophe reinsurance segment, which holds high strategic stakes for many reinsurers. Catastrophe reinsurance drives industry results in big-loss years and no-loss years, dictates reinsurers' capital needs and capital structures, and subsidises less profitable product lines,” said the report.

It also said that the current soft market demonstrates many of the traits of the late 1990s, including an overabundance of capital, double-digit annual price declines, a substantial rise in buyers' bargaining power, and predictions of industry consolidation. But the rating agency added that today’s market is not identical.

"One key difference is that reinsurance buyers today have greater incentives to improve capital efficiency, limiting their need for reinsurance," said Kevin Lee, senior credit officer at Moody’s. "Tighter regulatory oversight and the need for better internal governance have pushed insurers to get more mileage out of their capital.

“We believe reinsurers that are best positioned to cope with the sector's challenges are those that have already demonstrated their strategic relevance to clients and possess relevant size, superior claims service, whole-account capabilities, and a solid insurance platform."

The agency said that to remain competitive and still earn their cost of capital, reinsurers are deploying various defensive strategies which are credit neutral at best.

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