Excess capacity, leading to lower rates, has hit some types of reinsurance harder than others. Because excess-of-loss (XOL) reinsurance pricing is more sensitive to supply and demand fundamentals, rates could decline more quickly than those for proportional contracts. This could lead to credit fundamentals deteriorating more significantly for reinsurers with a substantial proportion of XOL business than for reinsurers with substantial proportional books. This topic is discussed in a report released today by Standard & Poor's Ratings Services titled, "Nonproportional Reinsurance Faces Disproportionate Challenges."
Improving U.S. primary insurance rates, on the other hand, have been flowing through to proportional reinsurance treaties (or contracts). However, limited cedant demand most likely precludes drastic growth in the proportional reinsurance market. Given these conditions, factors such as competitive position, capital strength, enterprise risk management, management's ability to negotiate underwriting cycles, and diversification are likely to become more crucial for XOL reinsurers.
"Under current conditions, the ability to adapt may be more critical for reinsurers with substantial XOL writings than for those with significant primary insurance and proportional reinsurance," said Standard & Poor's credit analyst Jason Porter.