Standard & Poor’s Ratings Services has issued a report on the current state of the reinsurance community, which concludes that its resolve will be further tested in 2005.
Striking a balance between the “demands of clients, brokers, and shareholders to maintain current underwriting volumes with the potential need to reduce exposures in response to falling premium rates across a number of lines,” is the major problem for reinsurance managers, S&P indicated. The report provides strong evidence that the market cycle continues to play an important role in management decisions.
S&P noted: “Some reinsurers have already publicly indicated that they will reduce their level of exposure to those lines of business that have peaked, for example, in global property/catastrophe, aviation hull, and big-ticket U.S. property risks.”
S&P credit analyst Stephen Searby called the rhetoric “encouraging,” pointing out that “it is also critical in order to avoid a repeat of the severe damage done to reinsurers’ financial strength in the last soft cycle.”
S&P concluded, however, that the “level of success achieved by the market in its rebalancing of business portfolios is likely to vary between companies and will be as dependent on the sophistication and accuracy of price-monitoring tools as on the ability of management to resist pressure to maintain current underwriting volumes.”
“The reductions in exposure will be combined with the underlying price reductions and are therefore likely to result in a material decline in premium volumes over the next few years,” Searby observed. “This will not be unwelcome, however, if it stems from a sensible risk management policy and should not generally be a concern for investors.”
The rating agency also indicated that the exposure cuts could result in increases in risk-adjusted capital and the potential return of excess capital to shareholders. “Again, this will not generally have a negative affect on ratings if seen in the context of sensible risk management,” said the bulletin. “Meanwhile, as premiums shrink, expense management will also become a more important part of the performance equation.”
S&P said it would “be monitoring reinsurers’ ability to trim overheads,” and that a flexible business model will consequently remain a considerable advantage over the coming months.”
The full report, entitled “Industry Report Card: Global Reinsurance”, was published on June 1, 2004, on RatingsDirect, Standard & Poor’s Web-based credit analysis system, at www.ratingsdirect.com.
Further ratings information can be found on S&P’s public Web site at www.standardandpoors.com;or by conctacting one of the company’s local offices.
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