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The rating agency maintains a stable outlook for the global reinsurance industry on the back of improvements in underwriting and risk management, a possible pickup in demand because of impending regulations and a hardening in some primary insurance markets that have laid the foundations for reinsurance pricing stability. But, it added that reinsurance rates may still fall in 2013 because of the ‘ample’ capacity in the market.
According to Moody’s, cyclical and ‘secular’ factors are driving a new wave of capital into reinsurance and catastrophe risk. It also stated that the ongoing shift from direct distribution to broker intermediation is making it easier for new entrants to compete.
More than $6 billion of new capital in various formats has entered the sector since 2011, raising the amount of alternative capital in the industry to $34 billion, according to estimates from reinsurance broker Guy Carpenter. Dwindling prospects in casualty and life reinsurance and low interest rates are steering reinsurers and new capital toward catastrophe risk, said Moody’s.
All this has added to the abundance of capacity in the market and may temper rate increases for reinsurance, despite signs that the primary market is starting to firm, it added.
In its Global Reinsurance Outlook Moody’s said that US primary insurance rates are increasing ‘across the board’ but acknowledged that in western Europe competition remains strong with meaningful rate increases generally restricted to previously troubled business lines such as UK and Italian motor.
In Europe the rating agency noted that tougher impending regulations are setting the stage for a rise in reinsurance demand. “We know regulatory capital requirements will increase under Solvency II, as confirmed by QIS5 last year. The question is when. The European Parliament is scheduled to vote on the Omnibus II Directive on November 20 but lawmakers are still debating the final version of the Directive. If the vote is delayed, there is a good chance Solvency II will not be implemented by 1 January 2014”, it said.
Moody’s said its stable outlook for the reinsurance sector could change if primary rates falter, the global economy collapses or a large catastrophe hits.