15 August 2014Asset management analysis

S&P: Downgrades are fuelled by competition

Increased competition fuelled by third-party capital is causing premiums to decline, threatening reinsurers’ competitive positions.

That is the view of rating agency Standard & Poor's in an article called Tough Competition Could Put Ratings on Global Reinsurers under Pressure, which states that one consequence of this could be that some players struggle to maintain their financial strength ratings.

The article represents a taster of an annual report it produces. S&P also says there is heightened potential for volatility in earnings because of weakened pricing.

The rating agency will publish its annual "Global Reinsurance Highlights" publication to coincide with the 2014 Reinsurance Rendez-Vous in September. It will provide a detailed perspective on the market, focusing on the competitive pressures that will impede reinsurers' ability to generate strong returns, and challenges for the sector to reinforce its relevance to existing and future clients as the global economy continues to evolve.

Global reinsurers are working to mitigate the effect on their businesses of the increased competition, the rating agency says.

“In general, we have not yet seen material signs that they have succumbed to the temptation to use inadequate pricing to retain market share. Instead, they are seeking more-profitable markets, or tweaking their investment strategies toward riskier assets to increase investment returns.

“Some of the stronger, more-diversified reinsurers are slightly reducing their exposure to property catastrophe business where prices have fallen materially. Smaller firms are teaming up and forming consortia to gain scale. That said, ratings on reinsurers remain sensitive to changes in our assessment of their business risk profile and risk position.”