Global reinsurance to breath above waters, life sector will see greener grass: S&P Global Ratings

Favourable reinsurance pricing, especially in short-tail lines, is expected to continue.

S&P Global Ratings has shifted its assessment of the global reinsurance sector from negative to stable. This change in outlook is influenced by structural shifts in underwriting practices during the 2023 reinsurance renewals. 

These changes have the potential to address long-standing industry challenges.

The reinsurance industry has faced a series of challenges, including more frequent and severe natural disasters, economic upheaval due to factors like high inflation, COVID-19, and geopolitical events like the Russia-Ukraine conflict. 

However, recent improvements in reinsurance pricing, along with stricter underwriting measures such as stricter terms and conditions, higher attachment points, reduced limits, and fewer aggregate covers, have generated optimism.

Additionally, increased investment income and life reinsurance earnings have further bolstered confidence in the sector's ability to overcome these challenges and achieve its cost of capital in 2023-2024.

S&P's stable outlook considers credit trends over the next 12 months, existing sector-wide risks, and emerging risks. As of 28 August, most of the top 20 global reinsurers had stable rating outlooks, with some assigned positive and negative rating outlooks.

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Underwriting results in the global reinsurance sector have begun to improve, with combined ratios trending lower. Reinsurers have adjusted their strategies, increased pricing, and tightened terms and conditions to achieve better results.

The industry has seen the emergence of hybrid business models as reinsurers diversify into primary specialty insurance, such as U.S. surplus lines, to reduce volatility in underwriting.

Favourable reinsurance pricing, especially in short-tail lines, is expected to persist, with projected combined ratios of 92%-96% and a return on equity (ROE) of 9%-12% in 2023-2024, barring significant catastrophe losses.

Economic slowdowns and persistent inflation pose challenges. Inflation can affect reserves, especially for long-tail casualty lines, and claims costs. The industry expects modest reserve releases of 1%-2% in 2023-2024.

Alternative capital, including catastrophe bonds, is providing additional capacity to the reinsurance sector, helping to offset the impact of unrealized investment losses.

The life reinsurance sector is expected to perform well in 2023 and 2024, with an ROE of 8%-10%. While it faced COVID-19-related losses, improvements in operating performance are anticipated as the pandemic's impact diminishes.

Despite recent improvements, reinsurers must remain vigilant in navigating complex and unprecedented conditions to consistently outperform their cost of capital.