Reinsurance profitability to rise in 2018: Moody’s

The profitability of the reinsurance sector is set to rise in 2018 driven by price increases, lower capital levels and higher interest rates, Moody’s said on Feb. 27.

Moody’s expects significant catastrophe losses in 2017 to prompt price increases in 2018, as already observed at the January 1 policy renewals. In addition, many reinsurers enter 2018 with less capital than in prior years after absorbing last year’s underwriting losses, potentially reducing available capacity in the market.

Reinsurers are also set to benefit from higher interest rates on the investment side of the business. The agency forecasts that yields on 10-year US bonds will increase to 3.4 percent from currently around 2.9 percent by 2019. German bonds will see yields rise to 1.33 percent from currently around 0.65 percent and UK government bonds to 2.08 percent from currently around 1.5 percent during the period. Rising interest rates will take some time to significantly increase reinsurers’ investment income, but companies that hold shorter duration investment portfolios (three to five years) should be among the first to benefit, Moody’s noted.

The industry consolidation that started in 2015 will continue in 2018, although there are fewer obvious targets or combinations, according to Moody’s. Consolidation will help achieve the scale necessary to maintain relevance over time in terms of providing a competitive cost base and to fund necessary technology and data investments.

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