Reinsurers must increase asset risks to boost investment returns
It is expected that global reinsurers’ strong enterprise risk management and increasing risk-return considerations will mean the increasingly efficient deployment of capital resources through investment frameworks, according to an S&P Global Ratings report.
The report, titled “Global reinsurers are reluctant to increase asset risks to bolster investment returns”, states that conservative investment profiles have shielded reinsurers' balance sheets since the 2008 global financial crisis and through the European sovereign debt crisis. Geographic diversification and exposure to highly rated countries have contributed to their ratings stability even as some primary insurers have seen their ratings deteriorate over the same period.
The prolonged period of low interest rates is, however, denting reinsurers' investment returns.
Sound technical results therefore remain key if reinsurers are to meet their planned return on equity targets. Asset and capital valuations have spiked, but will fall back within the short term as bonds mature. Meanwhile, credit conditions among sovereigns and corporates are weakening, the report said.
Given their prudent investment risk tolerances and appetites, framed in strict asset-liability management (ALM) policies, in S&P’s opinion, global reinsurers have limited investment options to bolster their results.
Over the next three years, S&P anticipates that reinsurers will continue to increase their exposure to 'BBB' rated bonds, as they have been doing over the past five years, maintaining average credit quality of their portfolios at least 'A', with limited impact on the industry excess of capital and overall ratings.
