Moody’s report, entitled “Global Reinsurance Outlook - 2016: Outlook Remains Negative Amid Excess Capacity, Shrinking Demand,” is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
The rating agency's report is an update to the markets and does not constitute a rating action.
According to Moody’s, reinsurers are increasingly focusing on previously uncharted areas including emerging risks and markets.
“The focus on different underwriting and strategic areas could mitigate some pressure on traditional lines, and reinforce reinsurers’ relevance in alternative capital, although the risks entailed in a large-scale move into new areas should not be underestimated,” says Brandan Holmes, a senior credit officer at Moody’s.
“A wave of mergers and acquisitions activity over the past 18 months is unlikely to remove significant excess capacity from the industry.”
Moreover, M&As involving primary companies, for example the ACE/Chubb merger, are likely to reduce the need for reinsurance, since larger combined entities will benefit from greater diversification and capital efficiencies, says Moody’s.
“Reinsurers face a predicament as capacity remains abundant while demand from primary insurers is decreasing. Demand has dropped because of the rationalization of reinsurance purchases and low global economic growth,” says Holmes.
As a result of the challenging environment, reinsurers’ earnings quality is deteriorating, says the rating agency.
Although reinsurers have generally maintained reported returns above their costs of capital, in Moody’s view the picture is gloomier when adjusting for normalized cat losses, reserve releases, and in some cases, investment gains.
In addition, Moody’s notes that alternative capital has become more widely adopted, although the alternative market remains untested in a major catastrophe event, which could produce unexpected outcomes.
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