S&P Comments on Reinsurer’s Diversification Efforts
In a new report, issued as one of several in conjunction with the annual Reinsurance Rendezvous in Monte Carlo, Standard & Poor’s Ratings Services examines the efforts of global reinsurers to diversify their portfolios.
The report titled “Reinsurer Diversification: A Means To An End, Not An End In Itself,” notes that such initiatives are often a useful by-product of a well-constructed portfolio of risks built around their core competencies.” However, S&P cautions, “the pursuit of diversification as an end in itself is more likely to be detrimental than beneficial to an entity’s long-term financial strength.”
S&P indicated that, while recent events have “increased the visibility of diversification,” they haven’t changed its relative importance. “When not pursued aggressively as an end itself, well-managed diversification has always been–and will remain–an important factor of a reinsurer’s long-term financial strength,” said S&P.
In essence diversification is nothing new, but (re)insurers and their stakeholders have recently been focusing more heavily on diversifying their portfolios for several reasons, which S&P cited as follows:
— The increased incidence of natural catastrophes.
— A growing body of evidence about the adverse effects of global warming.
— Improved sophistication of economic capital modeling.
— Regulatory developmentsāmost notably that of Solvency II in Europe.
S&P also acknowledged that “quantification of a (limited) diversification credit within our updated risk-based capital model” has fueled the perception that S&P is “now placing more emphasis on diversification within its analysis. This is not the case. In fact, for Standard & Poor’s to do so would likely encourage reinsurers to pursue diversification as an end in itself, which could well prove harmful to a reinsurer’s credit standing over the long term.”
The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at: www.ratingsdirect.com.
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Source: Standard & Poor’s