Higher reinsurance costs place pressure on global insurers' credit ratings

Tougher reinsurance market to persist

Higher reinsurance costs place pressure on global insurers' credit ratings

Insurance News

By Mika Pangilinan

Global insurers are facing increased scrutiny as their credit ratings come under pressure due to rising reinsurance costs that compel them to reduce coverage and assume more risks, according to new analysis from DBRS Morningstar.

Citing preliminary data from Guy Carpenter, Morningstar reported that global reinsurance prices surged by 27% in January compared to the previous year.

This marks the sixth consecutive year of price increases and the largest annual jump since 2006, following the aftermath of hurricanes Katrina, Rita, and Wilma.

“We expect the tougher reinsurance market conditions to continue in the short to medium term, putting to the test insurers’ risk management capabilities,” the analysis said.

Considering these hikes, Morningstar warned that insurers who maintain optimal reinsurance levels without raising premiums are likely to experience a deterioration in their underwriting profits.

Conversely, those who reduce reinsurance coverage may experience more volatile earnings as risks materialise.

To navigate these challenges, Morningstar highlighted three options for insurers to consider:

  • Pay more for the same reinsurance program
  • Limit new business or withdraw from certain regions or business lines
  • Adjust reinsurance programs and strategies

The second approach is one that a handful of major US carriers have taken, pulling back from offering new policies in the high-risk markets of California and Florida.

However, it was that third option that proved to be the most popular during the January – June 2023 renewal period.

But Morningstar advised that while adjustments to their reinsurance programs and strategies may be well within the risk appetite of certain insurers, others may not be as well capitalized.

“Ultimately, reduced reinsurance coverage affects insurers’ ability to tolerate higher earnings volatility, and it means that companies need to hold more capital to protect against higher exposure levels,” the analysis said.

Overall, Morningstar declared that “the soft reinsurance market is decidedly over,” stressing that insurers need to be adaptable in this new market environment.

What are your thoughts on this story? Feel free to comment below.

Keep up with the latest news and events

Join our mailing list, it’s free!