Higher reinsurance costs place pressure on global insurers’ credit ratings

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

Citing preliminary data from Guy Carpenter, Morningstar reported that global reinsurance prices rose 27% in January compared to last year.

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

“We expect the increasingly difficult conditions in the reinsurance market to continue in the short to medium term, testing insurers’ risk management capabilities,” the analysis said.

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

Conversely, those who reduce reinsurance coverage may experience more immediate earnings as risks materialize.

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

The second approach is one taken by some major US carriers, which have backed away from offering new policies in the high-risk markets of California and Florida.

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

But Morningstar advises that while adjustments to their reinsurance programs and strategies may be within the risk appetite of some insurers, others may be undercapitalized.

“Finally, the reduction in reinsurance coverage affects the ability of insurers to allow higher volatility of income, and this means that companies need to hold more capital to protect against higher levels of exposure ,” the analysis said.

Overall, Morningstar stated that “the soft reinsurance market is completely over,” emphasizing that insurers must adapt to the new market environment.

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