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The Actuary The magazine of the Institute & Faculty of Actuaries

Global reinsurance outlook no longer negative

Moody's Investors Service has changed the outlook on the global reinsurance sector from negative to stable, reflecting the momentum for a hardening in reinsurance rates, a refocusing on the value of reinsurance, and the good risk management and discipline across the sector in response to recent catastrophe losses.

The latest Moody's Industry Outlook report predicts that, over the next 12-18 months, these positive trends should neutralise the challenges facing the industry.

Dominic Simpson, a Moody's vice president and senior credit officer and lead author of the report, said: "Recent catastrophe losses loom large in our decision to revise the outlook to stable, as they have provided momentum for reinsurance rates to harden. However, over the longer term, it remains uncertain whether this expected plateau is a temporary halt to further pricing weakness or whether it will be followed by sustained market improvements."

The revision of Moody's outlook on the sector to stable reflects the moderation of the supply/demand imbalance, price stabilisation, loss ratios stabilising, and recapitalisation risks amid low equity valuations.

Moody's said that growth in the supply of reinsurance has been checked by recent cat losses, and future supply could be constrained by more expensive retrocessional cover and by consolidation for which conditions are favourable.

On the demand side, Moody's believes that insurers may not be able to further reduce their reinsurance uptake, despite tight reinsurance budgets. Furthermore, demand could be stimulated by insurers seeking more protection further to the roll-out of the updated RMS catastrophe model.

One large hurricane could tip the balance in favour of demand over supply. It added that not only have significant price increases been reported for some loss-affected regions/lines, but short-tail, non-loss affected areas have also seen pricing stability.

Moody's said it is seeing momentum for a hardening in reinsurance rates, a view that is reinforced by reinsurers' generally good underwriting discipline.

Furthermore, prices have stabilised for US commercial lines (Moody's has recently revised its outlook to stable from negative for this sector).

Although future pricing will key off the Atlantic hurricane season, Moody's envisages broadly stable-to-strengthening prices at the forthcoming 1/1 renewals.

It said that 2011 profitability is under meaningful pressure. Investment returns remain suppressed, and even before the end of what is predicted to be an active hurricane season, reinsurers have already far exceeded their cat budgets for 2011.

However, it believes that underlying loss ratios for reinsurers will at least stabilise during 2012. In addition, reserving levels are considered adequate despite the depleting reserve cushion, and the generally short average duration of reinsurers' fixed income portfolios may mean that investment income cannot decline much further.

Finally, it said that its central concern is that low equity valuations- which have persisted for nearly three years - could signal a more discriminate investor pool, raising concerns about the ability of some firms to replenish equity capital following a major catastrophic event. Security would be weakened for the policyholders and bondholders of those reinsurers which cannot reload capital.

In a separate statement AM Best said there are hopeful signs emerging for the global reinsurance industry after years of a soft market, weak investment returns, lukewarm investor interest and sluggish consolidation activity.

But it warned that catastrophe losses - estimated to be as high as $60bn for the first half of 2011 - hit firms very hard.

"Companies are hoping for, but not betting on, a more dramatic improvement in property cat pricing at the January 2012 renewal," it said.

AM Best warned that: "the effects of natural disasters worldwide are casting a shadow on reinsurers' balance sheets". It said this has started to move pricing on property catastrophe risks and says there are "some in the industry hoping for spillover effects into other lines - perhaps even casualty".

It warned that hurricanes and the advent of Solvency II could squeeze reinsurers further. It says reinsurers have stopped short of committing to capital-raising initiatives, but pressure to strengthen capital could lead to a thaw in merger and acquisitions.