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Reinsurance terms and conditions worsening

S&P Ratings Services director Taoufik Gharib

Reinsurers could be hit with worse-than-expected losses after a major event because worsening terms and conditions have increased their risk exposures.

That is the view of industry analyst Taoufik Gharib, of Standard & Poor’s Rating Services, who is on the Island for today’s PwC/Standard & Poor’s Reinsurance conference at the Hamilton Princess.

Some reinsurance executives have suggested that after years of pricing declines, rates could be near a bottom. But Mr Gharib warned reinsurers could still be getting worse deals in terms other than price.

“Reinsurance pricing continues to fall but the magnitude of the decline is less severe than it was in the past,” Mr Gharib said.

“However, terms and conditions are worsening — and that is like a price decline, when you’re charging the same price or slightly lower and covering more risk.”

He gave the examples of onshore energy or terrorism risks being tacked onto property catastrophe reinsurance coverage.

“The exposures become larger so when there is a loss, it could be larger than expected and that could hurt reinsurers down the road,” he added.

Mr Gharib spends much time on the Island with reinsurance executives whose firms are being evaluated for credit ratings by S&P.

He said industry leaders were thinking defensively as they aimed to navigate tricky market conditions, according to ratings agency Standard & Poor’s.

“The reinsurers believe that size is becoming increasingly important to efficiently compete globally, to get to a certain level of capital, product offerings and distribution to give them all the options available to navigate through this very competitive marketplace,” Mr Gharib said.

“They are coming up with defensive strategies, like M&A to enhance their product offerings and balance sheets and help themselves to continue to be resilient and relevant.”

The return on equity expectation for the typical international diversified reinsurer was in the range of 8 to 10 per cent, Mr Gharib said. “Executives will focus on 15 per cent but that is not achievable in this environment,” Mr Gharib added.

Enterprise risk management was as important as ever for reinsurers in this market environment, he said.

From a credit ratings point of view, the merger activity had made downgrades less likely to occur in the industry since several weaker or undiversified players had been incorporated into larger companies, he added.

However, S&P still has a negative outlook for the reinsurance sector, given the pressure on pricing, the limited organic growth opportunities in the developed world and low investment returns.

Specialty insurance lines were proving an area of growth focus for several Bermudian companies, while some had also located operations in Asia.

“Many of the Bermudians have established subsidiaries in Singapore, which is trying to replicate what Bermuda did with North America in Asia,” Mr Gharib said.

Cyber risk was another market likely to grow in coming years, though reinsurers were still grappling with how to write the correct policies and to properly limit their exposure.

Mr Gharib will moderate a panel on the cedants’ role in reshaping reinsurance this morning at the Bermuda Reinsurance conference.