Global reinsurers outlook is stable on capitalization

LONDON — The outlook for global reinsurers is stable going into 2020, reflecting strong capitalization, rising prices and growing demand, Moody's Investors Service said in a report published Tuesday. Nonetheless, there are still significant headwinds for the industry, and profitability remains vulnerable to above average catastrophe losses.

"Reinsurers' capitalization is strong, with a significant cushion above regulatory and risk-based capital requirements, and prices have climbed, relieving some pressure on profitability," said Brandan Holmes, VP-Senior Credit Officer at Moody's. "Still, low interest rates and declining reserve releases will pressure earnings, while climate change creates increased uncertainty. Increasing dependence on alternative capital-backed retrocession also poses a challenge to some reinsurers."

Reinsurers are increasingly exposed to asset risk as low interest rates encourage investment in lower quality corporate debt and illiquid assets. While cyber insurance presents new opportunities it comes with high risks. And climate change makes the frequency and severity of natural hazards less predictable, making it harder for reinsurers to model and price appropriately.

Although reinsurers have raised prices over the past two years, the increases have largely been limited to loss-affected lines, and prices on some lines of insurance remain significantly below 2012 levels. While underwriting profitability is still insufficient to support earnings resilience in an above average catastrophe year, prices are expected to rise further next year, based on responses to Moody's recent survey of reinsurance buyers, supporting additional improvement in underwriting profits.