Moody’s Investors Service has reinforced its negative outlook on the global reinsurance sector as fierce competition, over-capacity and low returns continue to put pressure on the industry, despite some positive developments. The rating agency
changed its outlook to negative from stable in June 2014.
The new report “Global Reinsurance Sector: Update to Negative Outlook”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
“Price declines will continue, albeit at a slower rate. We had initially considered a 15%-20% drop in next year’s catastrophe prices a distinct possibility, but such a severe scenario has now become less likely,” says Kevin Lee, a Moody’s Vice President and author of the report.
One reason for the projected deceleration in price declines is that non-traditional competitors, such as insurance linked securities (ILS) funds, have less scope to drive down prices given that they are on pace to report one of their least profitable years on record.
Even though interest rate forecasts have been revised lower in recent weeks, Moody’s expects to see some pullback from the ILS space. While many investors are still attracted to ILS some are pulling back due to inadequate returns, which suggests that a sharp rise in interest rates is not a necessary condition for exit of capital from ILS, a relief for traditional reinsurers.
Moody’s notes, however, that disruptions in the catastrophe reinsurance market will continue to create knock-on effects. “Low returns on liquid ILS, for example, will prompt some investors to broaden their investment range, further infringing on traditional reinsurers and forcing them to shift capacity to other lines,” says Mr. Lee.
Lastly, Moody’s says that it increasingly believes that a large US catastrophe event, more so than interest rates or any other factor, would test the reliability of non-traditional capital and determine its long-term penetration in the reinsurance market.
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