Disappointing year in store for reinsurers -- S&P
The exceptional financial results enjoyed by reinsurers in 1997 might harbour the seeds of a "disappointing'' year during 1998, rating agency Standard & Poor's (S&P) predicts in its latest report on the industry.
Premium growth and pricing levels for premiums could fall, leading some lines such as property catastrophe reinsurance to be cut back sharply as rates fall up to 20 percent or more in some regions.
"Not surprisingly, fewer multi-year treaties are being written at current pricing levels,'' S&P states in its 1998 Reinsurance Industry Outlook report.
"Bermuda's property catastrophe reinsurers have responded with a reduced appetite for aggregate limits, coupled with expansion into broader lower risk return lines of business. Profits, while buoyed by excellent loss experience over the past few years, are expected to be less robust in 1998.'' The expected good returns last year are a consequence of the relatively low level of natural and man-made catastrophe losses.
The effects of El Nino, a warming up of southern Pacific waters every two to seven years, usually plays havoc on world weather patterns, while at the same time the onset indicates a below normal level of hurricane activity in the Atlantic regions.
"The reinsurance industry generated excellent earnings though year-end 1997 as El Nino failed to live up to its advance billing, and catastrophes, both man-made and natural had limited economic impact on the insurance industry.'' The agency's analysts expect most US reinsurers will post good results in their nine-month reports due out in a few weeks, with a combined ratio of about 101 percent.
However, the good times might be over as premium rates get pushed down due to competition and as weather patterns return to normal. "Underlying 1997's exceptional results, however, may be the seeds for a disappointing 1998 as reinsurers accept further price decreases and the expansion of policy terms,'' S&P states. "Recent winter storms across Europe already indicate a return to normal catastrophe losses and a tougher year for European reinsurers as rate reductions accompany larger expected property losses.'' On the positive side last year premium volume grew seven to eight percent in the US in 1997, S&P estimates. Premium growth could fall to about three percent in 1998. The easy availability of capital and capacity will limit the ability of reinsurers to hold the line on pricing.
"Further clouding the outlook is the potential for a `normal' year of catastrophe losses'' which S&P said could add up to five percentage points to the combined ratio.
"Ominous signs also include smaller reserve additions in 1997, as reinsurers across the board seemed to conclude that new losses will not develop as fast, or severe, as old losses,'' S&P concludes. "Recent environmental legislation in Europe and increased litigation activity dim the prospects for earnings growth.'' Capital adequacy, however, is on average strong and should help companies withstand moderate underwriting losses and further reserve strengtening.