As reinsurance capacity outstrips demand, competition in the global reinsurance market is intensifying. Premium rates declined materially at the major renewal dates (January, April, June, and July) in 2014. As reinsurers look to deploy excess capacity, we observe that competition is spilling over from the catastrophe lines of business, and is now weakening pricing in most lines around the globe.


The strength of reinsurers’ balance sheets has enabled most of them to withstand the pricing pressure and competition to date. Absent this, we would likely have already taken rating actions on some of the reinsurers most exposed to these pressures. We estimate that over half of the global reinsurers that we rate are more susceptible to the current competitive and earnings pressures. And even those that are well- positioned to navigate softening prices now are likely to find it harder to handle the pressure that will face the industry over the longer term.


Nonetheless, we think reinsurers have a continuing role to play in the global economy; and they need to emphasize this to current and future clients. For example, they can facilitate the use of big data to help clients identify fraud, protect themselves against cyber-attacks, or manage their risk exposures. They can also help governments and corporations improve their resilience to natural disasters and protect themselves against extreme events.


In providing solutions for long-term issues, reinsurers can also establish a foothold in and help unlock insurance markets, thus solidifying future competitive positions.


In January, we revised to negative our view of credit trends in the reinsurance market. We continue to see downward pressure on the sector as competition


Chart 1: Historical Industry Capital Levels (Bil. $)


0 1 2 3 4 5 6 7


Sidecar issuance (left scale)


Rated cat bond issuance (left scale)


Top 40 reinsurers shareholders' equity (right scale)


(Bil. $)


50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000


0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 © Standard & Poor's 2014.


increases, and we expect this to weigh on reinsurers’ ability to generate acceptable returns over the next 12 to 24 months. This could weaken creditworthiness in the sector as increased exposures eat away at capital adequacy and heighten potential for volatility and as pricing and competition erode business risk profiles. As a result, we could see fewer, larger reinsurers operating in the developed markets.


Competitive Pressures Are Piling Up Just as large global multiline insurers are reducing their reinsurance purchasing, capital is flooding into the reinsurance market from both traditional and alternative sources (see Chart 1), attracted by strong earnings. The combination has increased competition in most lines and regions around the world, forcing down pricing. We estimate that pricing across the sector will decline between 5% and 10% for the year, particularly on excess of loss reinsurance.


Table 1: Global P/C Reinsurance Earnings Forecasts (%) 2009 Loss ratio


Combined ratio Return on equity f-=Forecast


Global Reinsurance Highlights 2014


56.8 86.8 22.2


2010


62.1 92.6 14.1


2011 75.1


105.6 5.2


2012


57.0 88.1 14.4


2013


53.0 86.4 14.1


2014f


60-65 95-100 7-9


2015f 62-67


98-104 7-9


Five-year average


(2009-2013) 60.8


91.9 14.0


We could revise our competitive position assessments, or our ratings, on reinsurers that can’t withstand the resulting pressures.


The search for yield attracts new players


Reinsurers’ recent track record of strong earnings, has attracted new forms of capital to the market because investors are keen to diversify their risks and find ways to achieve better yields while interest rates remain low (see Table 1). We have therefore seen an influx of alternative capital from pension funds and hedge funds (see Chart 1), which are supporting insurance-linked securities (ILS), or start-up reinsurers, the so-called Hedge Fund Re business model (see “Hedge Fund Reinsurers: Are The Potential Rewards Worth The Added Risk?”). These companies’ strategy aims to produce above-average investment returns on the premiums received from writing lines such as liability insurance, where insurers


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