Global Insurers Respond to Higher Reinsurance Costs by Retaining More Risk, Negatively Pressuring Credit Ratings

DBRS Morningstar published a commentary discussing the credit rating implications of increased risk retentions by global insurers as they respond to higher reinsurance prices and tighter terms and conditions.

Key highlights include the following:

-- Global property reinsurance prices increased sharply in 2023 on lower capacity, above-average catastrophe losses, higher inflation, and more financial and macroeconomic volatility.

-- More expensive and restricted reinsurance coverage is leading to higher property premiums, new business restrictions or exits, and adjustments to reinsurance programs purchased by insurers.

-- In response to the challenging reinsurance market, most insurers have opted to increase their risk retentions, which, depending on their risk profile, may have negative implications for their credit rating.

“We expect the tougher reinsurance market conditions to continue in the short to medium term, putting to the test insurers' risk management capabilities, which, if not adequate, could result in adverse credit rating implications,” said Nadja Dreff, Head of Canadian Insurance. “Insurers who maintain optimal risk retention but cannot increase premiums to keep pace with higher reinsurance costs will see their underwriting profitability deteriorate, while those who hold more risk on their balance sheet are likely to experience more earnings volatility. Both scenarios negatively pressure credit ratings.”