Hard market coming to an end for most classes of business

After a period of unprecedented downgrades, ratings agencies believe the outlook for the global reinsurance sector is beginning to stabilise.

After downgrading seven of the top 20 reinsurers in the past two months, Standard & Poor's maintained a negative outlook on the industry, but said that some stability was beginning to return to the market.

"The worst is probably behind us, but that's not to say we're calling a stable outlook yet," said Standard & Poor's director of financial services ratings Stephen Searby.

The agency described the profits recorded so far in 2003 by reinsurers as "disappointing" given the current hard market. It accused reinsurers of "reserving by stealth" by using some of this year's profits to top up reserves.

Searby said that this covert reserving was negative because it implied that either reinsurers' reserves were still not at adequate levels, or that they thought the next soft market would be severe and were preparing for "another long winter".

Standard & Poor's said that while the hard market was likely to continue until 2005, for many classes of business 2003 marked the top of the cycle and rates in 2004 would be flat, with only marine business and long-tail business likely to achieve rate increases.

AM Best said that while some classes of business, such as property, were softening, this was typically occurring in rates well above technical underwriting levels.

Moody's has maintained a negative outlook on the global reinsurance sector, due to likely adverse loss developments from the 1998 to 2001 years of account and increasing asbestos liabilities.

It said that the number of ratings downgrades was likely to outweigh the number of upgrades over the next six to 12 months, but downgrades would be less common than over the past year.

Analysts from Moody's said that the market could begin to soften in 2005, with some classes such as US property and aviation having already peaked.

They said that reinsurers would be at risk if they failed to maintain adequate pricing when the market begins to soften, as a failure to do this would inhibit the sector's ability to raise the capital needed to maintain current credit ratings.

Fitch has also maintained a negative ratings outlook for the reinsurance sector due to ongoing concerns about reserve adequacy, particularly of the world's largest reinsurers. Start-up reinsurers, such as those based in Bermuda, would continue to have an advantage over those encumbered by legacy reserve issues, with asbestos remaining the major problem for established reinsurers.

Fitch said the hard market would continue in 2004, but expected rate increases to be lower than the 10%-15% achieved in 2002-2003. It said that the market could soften in 2005, but a quick upturn in investment markets would accelerate any softening as reinsurers would once again rely on investment returns and write business at inadequate rates.