Global reinsurers are experiencing challenges from both the asset and liability sides of their balance sheets, according to a report published by Standard and Poors (S&P).
Lower prices in the property catastrophe and specialty markets continue to affect underwriting income, said the ratings agency. Capital from alternative sources has become more mainstream and is now "a prominent competitor" with traditional reinsurance.
In addition, investment returns are affected by lower interest rates and greater uncertainty in global equity and credit markets. Moreover, emerging risks such as more volatile and extreme weather, along with evolving regulations, are "a strain on reinsurers' profitability".
However, S&P says the reinsurance sector as a whole has strong enterprise risk management (ERM) frameworks, leading to disciplined risk selection, conservative underwriting and investment asset allocation, despite lower returns.
"We view reinsurers as well-equipped to weather the headwinds they face, as reflected in our broadly stable outlook on the sector," said S&P Global Ratings credit analyst Sridhar Manyem.
The ratings agency also sees reinsurers as "leading the pack" in risk models and have a longer track record for their use than in other sectors.
"Reinsurers need to manage concentrations of risk that could creep up from various sources and prepare for stress scenarios that are typically at high confidence levels, which requires more reliance on statistical extrapolation than empirical data," said S&P in the report.
"Modeling therefore takes on more significance for reinsurers' risk selection."
The agency believes reinsurers' senior management and boards generally have more experience with communicating and reporting model results and understand the importance of models' limitations and assumptions.
Therefore, confidence and experience in using models is also "a key differentiator" for the sector.
However, S&P notes these frameworks and new techniques have not been tested in by events such as Hurricanes Katrina, Rita and Wilma in 2005.
"It remains to be seen how well these frameworks have prepared the industry for the hurdles that are sure to come."