S&P Says Global Reinsurers Need Price Rises To Rebuild Capital

Standard & Poor’s Ratings Services said in a report published today that reinsurers have had sufficient excess capital available to absorb the shocks of the past year, but much of that cushion has now been eroded.

The report, titled “Global Reinsurance: Excess Capital Absorbs The Shock To Date; But There Is Limited Further Margin For Error,” explained that the “excess capital built by the sector, driven by two successive years of record profitability, has enabled most reinsurers to withstand the extreme stresses applied to both sides of the balance sheet, particularly during the second half of the year.”

Credit analyst Peter Grant pointed out that this “explains why we have not yet seen the need to take widespread negative rating actions within the sector.”

However, S&P went on to note that it has “revised some of its medium-term expectations for the sector in light of recent events. We now expect the combination of the substantial capital depletion seen to date, lower prospective investment yields, a spike in the cost of capital, and constrained financial flexibility to translate into substantial (risk-adjusted) price increases at the forthcoming January renewal.”

In S&P’s analysis rate increases need to be between 5 and 10 percent on average “to enable reinsurers to rebuild excess capital to the extent we consider necessary to compensate for their loss of financial flexibility.”

“Lesser price increases could cause us to change our outlook on the sector to negative, and to revise the outlook or ratings on those reinsurers that we believe to be most exposed, namely those that are either thinly capitalized relative to their current rating level or that are, in our view, excessively exposed to further declines in investment markets or concentrations of insurance risk,” Grant added.

The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at: www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to: research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor’s public Web site at: www.standardandpoors.com.

Source: Standard & Poor’s