The resolve of reinsurers will be tested in 2005 as managers seek to balance the needs of interested parties in maintaining underwriting volumes with the potential need to reduce exposure, said Standard & Poor’s (S&P) rating services.
It said some insurers had already indicated that they will reduce their level of exposure to those lines of business that have peaked, said the company.
“The rhetoric is encouraging,” said S&P credit analyst Stephen Searby. “It is also critical in order to avoid a repeat of the sever damage done to reinsurers’ financial strength in the last soft cycle.
But in a new report, S&P said the level of success achieved by the market in rebalancing its portfolios is likely to vary between companies and will be as dependent on the sophistication and accuracy of price-monitoring tools as on the ability of management to resist pressure to maintain current underwriting volumes.
“The reductions in exposure will be combined with the underlying price reductions and are therefore likely to result in a material decline in premium volumes over the next few years,” said Searby.
“This will not be unwelcome, however, if it stems from a sensible risk management policy and should not generally be a concern for investors.
S&P said the exposure cuts may also result in increases in risk-adjusted capital and the potential return of excess capital to shareholders. But it said this would not generally have a negative affect on ratings if seen in the context of sensible risk management.
The report, ‘Industry Report card: Global Reinsurance’ is available from ratingsdirect.com.
