Competition in the global reinsurance industry is heating up. Premiums are declining, and an influx of third-party capital is fueling excess capacity in the industry, exacerbating the problem. The knock-on effects could threaten reinsurers’ competitive positions and their ability to maintain their financial strength. Standard & Poor’s Ratings Services also sees heightened potential for volatility in earnings because of weakened pricing. However, global reinsurers are working to mitigate the effect on their businesses of the increased competition. In general, we have not yet seen material signs that they have succumbed to the temptation to use inadequate pricing to retain market share. Instead, they are seeking more- profitable markets, or tweaking their investment strategies toward riskier assets to increase investment returns. Some of the stronger, more-diversified reinsurers are slightly reducing their exposure to property catastrophe business where prices have fallen materially. Smaller firms are teaming up and forming consortia to gain scale. That said, ratings on reinsurers remain sensitive to changes in our assessment of their business risk profile and risk position.
The trend for large cedents (insurance companies) to seek to optimize their reinsurance spending as their purchasing decisions are made at the group level, rather than at the operating unit level, seems to be accelerating. This approach streamlines reinsurance programs and reduces an insurer’s need to use a large number of reinsurers for protection. As a result, smaller and less-diversified reinsurers, especially catastrophe-concentrated players, will feel pressure on their market positions. We could reflect these weaker competitive positions, greater industry risk, and potentially lower earnings in our ratings.
Many of the 23 global reinsurers that we rate share at least strong capital adequacy, strong competitive positions, and strong ERM capabilities. These industry strengths have contributed to the stability of our ratings on global reinsurers over the past few years. The average FSR for the 23 global reinsurers that we rate remains strong, at ‘A’.
Diversification Enables Reinsurers To Handle Increased Competition
Under our criteria, we assume that all global reinsurers are exposed to a similar level of industry and country risk. Differentiation in the business risk profile therefore depends
Global Reinsurance Highlights 2014
Chart 1: Business Risk Profile (No. of companies)
10 12 14
0 2 4 6 8
Highly vulnerable
Data as at July 21, 2014 © Standard & Poor's 2014.
Vulnerable
Fair
Satisfactory
Strong
Very strong Excellent
Chart 2: Competitive Position (No. of companies)
10 12 14 16
0 2 4 6 8
Weak
Less than adequate
Data as at July 21, 2014 © Standard & Poor's 2014.
chiefly on the reinsurer’s competitive position.
Under our criteria, a competitive position that is defined as very or extremely strong indicates that the reinsurer has developed stronger brand names and a good reputation. In addition, the reinsurer likely has a more defensible portfolio spread across different areas and business lines. In some cases, we can reflect reinsurers’ exposure to this heightened competition through adjusting our view of their business risk profiles. Our overall view of the reinsurance industry’s intermediate risk profile reflects earnings, pricing, and settlement characteristics across all lines of reinsurance business. We believe that reinsurers with a well-balanced,
truly global product offering can benefit from diversification and are less acutely exposed to the pressures experienced in the property catastrophe lines of business today. However, if a reinsurer’s business is weighted toward a line of business or region that is riskier than the rest of the market, such as property catastrophe, we may adjust our view of the company’s business risk to reflect this concentration.
In most cases, a downward revision to the business risk profile would trigger a negative rating action, because ratings on reinsurers are sensitive to changes in this subfactor. We assess the typical global reinsurer as having both a strong business risk profile and a strong competitive position (see Charts 1 and 2).
63
Adequate Strong Very strong
Extremely strong
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