Rating Agency Maintains Negative Outlook on Global Reinsurance Sector

The global reinsurance sector won't earn its cost of capital this year and could struggle to do so again in 2022, according to a comment from S&P Global Ratings.

The rating agency said it is maintaining its negative outlook for the reinsurance sector as the industry's returns continue to fall short.

S&P noted that the global reinsurance sector has generated weak underwriting results in the past 4 years, with 2021 looking like another sub-par year. The industry continues to suffer from increased frequency and severity of natural catastrophe losses, driven by rapid urbanization and the impacts of climate change, S&P said.

This year is likely to be the fifth straight in which the top 21 global reinsurers rated by S&P—a group that generated more than 70 percent of global net reinsurance premiums written in 2020—exhaust their annual natural catastrophe budgets, the report said. In addition, the COVID-19 pandemic has added to industry losses, especially among this group of reinsurers, S&P said.

The global insurance industry experienced approximately $44.6 billion in COVID-19-related losses in 2020 and through the first half of 2021, with the top 21 global reinsurers experiencing about $21.6 billion—nearly half—of those losses, according to S&P.

"Despite the elevated losses, the industry's capital adequacy has been robust and remains redundant at the 'AA' confidence level, aided by capital raises and financial markets' recovery," S&P said. "However, the industry still faces secular challenges and competitive market dynamics, remaining fragmented as it battles the commoditization of its business."

According to S&P, many reinsurers have adopted hybrid models under which they write both reinsurance and specialty insurance to hedge the challenges facing the reinsurance sector. "Indeed, an increasing number of the top 21 global reinsurers are expanding their insurance more than their reinsurance business, taking advantage of better pricing on the primary commercial side while aiming to reduce volatility," the S&P report said.

Given the global reinsurance sector's underperformance, premium increases should continue during 2022 renewals, though the pace of those increases might slow, in part due to ample capacity, the S&P report said.