Hardening in reinsurance market prompts Fitch to revise sector outlook for 2021

The current hardening pricing conditions and stabilising pandemic-related claims have prompted Fitch to revise its sector outlook for global reinsurance in 2021 to stable. The move comes nearly eight months after it was downgraded to negative due to increased concerns over COVID-19.

The revised sector outlook also reflects Fitch's expectation that the underlying fundamentals of major developed non-life primary insurance markets, the main source of business for reinsurers, will stabilise in 2021.

"The sector outlook is based on an updated definition employed by Fitch, which considers underlying fundamentals expected in 2021 relative to actual fundamentals in 2020," the agency explained.

Fitch noted that although the ultra-low interest rate environment remains and asset quality continues to deteriorate, it expects the hardening market to continue into 2021, with price increases gaining momentum through the various renewal seasons since the onset of the pandemic.

Rates in the reinsurance market began to rise in January 2020 due to higher natural catastrophe claims and concerns over reserve adequacy and loss severity for US casualty businesses.

According to Fitch, the demand for reinsurance is likely to increase due to heightened uncertainty linked to the pandemic and primary insurers' stronger ability to purchase reinsurance given increases in their own pricing.

"The sector's capital strength has remained largely unscathed despite substantial pandemic-related underwriting losses in several segments, including contingency/event cancellation, travel, trade credit and surety, business interruption and mortality," it said. "This was achieved thanks to a series of capital increases and the recovery of financial markets from the lows recorded in spring this year."

Fitch also highlighted that changes in reinsurance terms and conditions, notably the exclusion of pandemic cover in new and renewed contracts, should progressively reduce the potential for future property and casualty reinsurance claims stemming from the pandemic.

But, the uncertainty around ultimate losses from the pandemic continues to remain high, it noted.

The agency also warned that reinvestment rates are well below the running yields on reinsurers' investment portfolios, and are continuing to fall. The resulting pressure on reinsurers' investment income will erode some of the likely increase in underwriting income in 2021.

"Moreover, a weak economic recovery could foster a deterioration in asset quality, to the detriment of the sector's profitability," said Fitch. "Lower investment income may motivate reinsurers to maintain underwriting discipline and push up prices, but competitive forces could ultimately thwart these aims."

Fitch's sector outlooks for major developed non-life primary insurance markets in 2021 are stable or improving, reflecting its view that most pandemic-related claims will be reserved for in 2020, and the claim levels should normalise in 2021.

The agency expects rate increases in several key lines to take firmer hold in 2021, but economic pressures will likely dampen primary insurers' premium revenue and could weaken their asset quality.