S&P: Reinsurers unlikely to meet cost of capital in 2020

The top 20 global reinsurers will likely report an aggregate combined ratio of between 103 and 108 percent in 2020 with the sector very unlikely to meet its cost of capital this year, S&P Global Ratings has warned.

The forecast suggests a 6 to 8 percentage point contribution from Covid-19, based on an industry loss of around $35bn to $50bn for the pandemic.

To date, S&P said the top 20 reinsurers had reported $12bn of Covid-19 losses, of which 78 percent is for IBNR claims.

S&P said it expected to take further negative rating actions on reinsurers over the next 12 months, reflecting the negative outlook it holds on the sector.

Despite the negative outlook, Ali Karakuyu, director and lead analyst at S&P, said the sector’s capital position remains robust.

“We’ve seen very high rate rises on the back of Covid-19. P&C reinsurance pricing has been hardening during the past 18 months in reaction to natural catastrophe and pandemic losses, as well as alternative capital and retrocession capacity constraints.

“We expect the positive price momentum will carry into 2021 supporting top line growth against the economic downturn.”

On average, Karakuyu said rate rises at 1/1 would be mid-single-digits, with potentially higher increases for loss-impacted business.

Karakuyu said he did not anticipate revising the sector’s outlook back to stable before 2021, but said S&P could reconsider its negative view “at the point that we believe that the sector may earn its cost of capital”.

“These rate rises are still catching up with pricing inadequacies of previous years. We are seeing substantial levels of rate increases, some as high as 80 percent in loss-impacted business lines.

“The reason for the negative outlook is we think there is still a risk the level of rate rises is not sufficient enough,” he said.

Reserve release contributions are also reducing, partly due to US casualty strengthening, as well as loss creep from hurricanes Irma and Michael and Typhoon Jebi.

“We do still expect some reserve releases, but we expect them to be lower than the historical average, at around 2-3 percentage points,” Karakuyu said.

S&P said alternative capital capacity, particularly for collateralized reinsurance, will remain constrained in the near term amid concern from investors over capital being trapped for four years in a row.

Maren Josefs, associate director for alternative capital at S&P, said: “For the first time since 2008 we saw a drop in ILS capacity in 2019, and that trend has continued in 2020.

Despite the drop, she said the contribution from third party capital remains stable at 15 percent of the global reinsurance capital base.

“Based on discussions with reinsurers, we believe around $20bn of ILS capital is currently trapped, driven by collateralised reinsurance and sidecars.”

S&P said the pullback in alternative capital was likely temporary. “During the past 18 months, it seemed that alternative capital ran out of steam, but the case for investing in low-correlated insurance-linked assets to diversify in a low interest rate environment remains valid,” the rating agency said in a new report on the sector.

“As a result, we believe alternative capital backed by long-term investors remains committed to property-catastrophe risk and is here to stay, further supported by hardening reinsurance pricing.”