Property/casualty reinsurers aren’t just facing heavy competition, declining premiums and excess capacity. These conditions, over time, could also jeopardize their financial ratings moving forward, Standard & Poor’s Ratings Services concluded.

Details of their assessment will be part of the rating agency’s annual “Global Reinsurance Highlights” publication set for release in September. But Standard & Poor’s has published a brief article highlighting the financial ratings issue that will be included in the larger report. The article, by S&P analysts Ali Karakuyu and others, expresses major concern about the ever-softening reinsurance market and the influx of third-party capital that’s heightened competition and made the situation worse.

As a result, S&P said that long-term effects “could threaten reinsurers’ competitive positions and their ability to maintain their financial strength” and also create a greater potential for earnings volatility due to weakened pricing.

In the short term, the S&P article asserts, increased global reinsurance competition will likely curtail earnings in 2014 and 2015. And if the trend of low catastrophe losses ends, then reinsurers’ capital strength could be at risk, according to S&P.

“For the past couple of years, the sector has posted strong operating results, partly because catastrophe losses have remained low and reinsurers have also released reserves set aside in previous years,” the S&P article noted. “However, reserve releases are likely to diminish in 2014-2016, which could be problematic for those that have been heavily dependent on prior-year releases.”

S&P warns that softening prices continuing at the same time will “cause the sector’s operating performance to deteriorate in 2014 and 2015 compared with recent years,” which “could impair the industry’s ability to generate capital organically when needed.”

Still, S&P noted that global reinsurers are trying to minimize the effects that increased competition inflicts on their business.

“In general, we have not yet seen material signs that [reinsurers] have succumbed to the temptation to use inadequate pricing to retain market share,” S&P wrote. “Instead, they are seeking more profitable markets or tweaking their investment strategies toward riskier assets to increase investment returns.”

In addition, S&P said, some of the stronger reinsurers that are more diversified are slightly pulling back from their exposure to property catastrophe business, which has seen more drastic price declines.

As well, “smaller firms are teaming up and forming consortia to gain scale,” S&P noted.

But for the foreseeable future, reinsurers are still vulnerable to changes in their business risk position, S&P said.

Source: Standard & Poor’s