A neutral outlook for reinsurance: looking ahead with Fitch’s Mazzuoli

Fitch Ratings has been one of the mainstays in financial services for over a century, with its analysis and commentary on the issues buffeting economies being some of the most insightful reading you find day to day.

One area that Fitch has always had an eye on is the insurance and reinsurance markets. So it was interesting and informative to have Robert Mazzuoli (pictured), director of EMEA insurance at the firm, speak to Intelligent Insurer about the market as Fitch sees it and where it may go over the rest of 2022 and into 2023.

The industry may breathe a sigh of relief: Mazzuoli said that Fitch’s outlook on global reinsurance is a neutral one.

“The sector outlook describes business conditions and whether we believe that earnings and capital will remain broadly stable, improve, or deteriorate. The neutral sector outlook expresses our view that profits should remain broadly stable with the performance of last year,” he said.

There are several moving parts behind this assessment.

“On one hand, inflation rates are very high and that affects claims inflation in the industry and the efforts of the industry to raise premium rates. We believe that the hardening market we’re seeing will be strong enough to compensate for claims inflation. Underwriting margins should remain broadly stable,” Mazzuoli explained.

On the other hand, he said, there are rising interest rates, something that he calls “ambiguous in nature” because of their impact on reinsurance.

“There’s also rising reinvestment yields, which is positive. Against that, we have falling asset values across all major investment classes, which aren’t good for financial performance and capital. And then we have the evergreen topics such as natural catastrophes, which remain very relevant to the industry.”

The hard market and climate

A common theme within insurance circles has been that of the hardening market. Mazzuoli was cautious in his answer, pointing out that market hardening is different across the various sectors.

“We must differentiate between the property market and, especially, the property catastrophe market, along with the casualty lines of business in the general casualty market. What we see on the property cat side is a hard market,” he said.

“Why do we believe that? It’s because we have seen a couple of announcements and actions by reinsurers to withdraw and cut capacity to move out of certain lines of business. The placement of these risks has become problematic, leading to increased premium rates.”

He added: “On the other side of the spectrum, in the casualty business premium rates have been stable. There’s not been much movement there. That’s because underlying underwriting profits look okay for now.

“Social inflation has come down a bit, even if there may be false hopes there. But there is more capacity, and more businesses are being taken onboard. As a result, premium rates have not moved up any further.”

Issues around climate change, while impactful on humanity, echo deeper within the insurance industry. During this year Europe has gone through an unprecedented heatwave, more of which is promised in the coming years. It is a subject that is vexing insurers, given that it is there are increasing numbers of catastrophic weather events. Recent work from Swiss Re indicates that the global estimated insured losses from natural catastrophes in the first six months of this year were 22 percent above the average over the last decade.

Mazzuoli picked up on this thread. “What we’ve seen so far this year is a continuation of trends established over recent years. Natural catastrophe claims have moved up, due to secondary peril events. What we’ve seen in the market is around $39 billion of insured claims, which is about 18 percent above the 20-year average.

“The two costliest events in the first half of the year were the floods in Australia and the winter storms in Europe. These are typical examples of secondary peril events that are probably driven by climate change.”

Accounting standards

On what is on the horizon for Fitch, Mazzuoli began to talk about accounting standards around the world.

“It is a very complex and confusing topic but I’d like to mention the accounting treatment of interest rate movements on capital. We have different accounting regimes around the globe, and most of them in reinsurance see rising interest rates lead to falling asset values, which are negative for reported capital and which we also see in aggregate numbers for industry,” he explained.

“This is mostly an accounting effect as rising interest rates are positive for the industry. When you apply an economic view to the balance sheet, rising interest rates are a net positive. This is something we see in regulatory solvency ratios, which have improved in H1 2022 on the back of rising interest rates.

“It is worth highlighting that accounting capital might not be the right number to look at when assessing capital adequacy or strength of the balance sheet,” he said.

Also looking ahead, Mazzuoli predicted that it would be the circumstances of individual companies that determined their movements in 2023, rather than industry-wide shifts.

“But if circumstances change then the expectations will too,” he concluded.