By; OLIVIA NNOROM
DBRS Morningstar, global credit rating agency, has issued a warning that insurance companies worldwide may witness a decline in their underwriting profits if they maintain optimal reinsurance levels without adjusting premiums.
The agency’s cautionary statement comes as it highlights the growing scrutiny faced by insurers due to escalating reinsurance costs and rising claims, a situation that has prompted a closer examination of insurance companies’ credit ratings.
According to Morningstar‘s report, which references preliminary data from risk and reinsurance specialist Guy Carpenter, global reinsurance prices exhibited an upward trend in January 2023.
The data indicates a significant increase of 27% compared to the previous year.
This rise in reinsurance prices reflects the growing costs and risks associated with the global reinsurance market.
The agency noted that this increase marked the sixth consecutive year of price increases and the largest annual jump since 2006, following the aftermath of hurricanes Katrina, Rita, and Wilma.
The analysis conducted by the global insurance expert, indicates that the challenging conditions in the reinsurance market are expected to persist in the short to medium term, and will test insurers’ risk management capabilities.
Furthermore, the agency noted that reinsurers who reduce coverage may experience more volatile earnings as risks materialise.
“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.
Morningstar has highlighted three options for insurers to explore to enable them navigate these challenges;
- Pay more for the same reinsurance program
- Limit new business or withdraw from certain regions or business lines
- Adjust reinsurance programs and strategies
The agency noted that while a handful of major US carriers take the second approach; pulling back from offering new policies in the high-risk markets of California and Florida, the third option proved to be the most popular during the January – June 2023 renewal period.
However, they 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 capitalised.
Morningstar emphasised that the era of a soft reinsurance market has come to an end, stressing the need for insurers to be adaptable in the new market environment, urging insurers to employ approaches that would enable them recognize and respond to the changing dynamics of the reinsurance market, which is no longer characterised by favourable conditions. The declaration serves as a call to action for insurers to adjust their strategies and operations accordingly to thrive in the evolving landscape.
