Although the pricing cycle for reinsurers is at a critical juncture, Standard & Poor's analysts say they are confident that enterprise risk management practices will encourage cautious pricing and prevent future downgrades.
A report released yesterday by Standard & Poor's Ratings Services, "2008 Reinsurance Renewals: Underwriting Discipline Takes Center Stage As Price Adequacy Declines Further," found that while pricing for most lines of business, across most geographies, is still adequate for the risks being covered, many segments appear to have reached the point where further price reductions would signal the transition from a softening market into a soft market.
Thomas Upton, an S&P analyst in New York, told National Underwriter, however, that "thus far, the evidence that we have suggests that the reinsurers are holding the line."
He explained that the industry has benefited "a great deal more from its enterprise risk management approach in this cycle than it has in previous cycles."
Mr. Upton noted that S&P has said it believes "enhanced risk management capability will lead individual companies, as well as the industry as a whole, to prudent behavior, which will make this down cycle somewhat less severe and less prolonged than some past down cycles. We're saying that we'll be looking for evidence of that expectation in the coming year."
Reinsurers so far are holding their own, he said. "If we saw any evidence that would suggest the company's ERM was not equal to the task of leading the company through this down cycle, we would have already reflected it in our rating."
What the rating agency is on the alert for, he said, is "unforeseen behavior, or behavior that is different from what we expect." For example, one company writing business turned down by all other companies, or at prices turned down by all other companies, "that clearly broached the limits of prudent pricing practices," he said.
Standard & Poor's credit analyst Peter Grant said in a statement: "It is worth reiterating that Standard & Poor's does not consider improved underwriting discipline to be an optional extra for reinsurers. In our view, it is a necessity if the sector intends to protect its strong overall ratings."
He added, "If further deterioration in pricing occurs during the second half of 2008 and into 2009, we will be assigning negative outlooks to those companies whose response we consider to be either inadequate or inappropriate."
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