Reinsurers will struggle with profitability, warns Fitch

Credit fundamentals will continue to reflect intense pricing competition and low investment yields, limiting profitability in the reinsurance sector.

That is the verdict of Graham Coutts, EMEA head of reinsurance at Fitch Ratings, despite the rating agency acknowledging that pricing has been gaining some momentum in recent months.

On a more upbeat note he added: “The traditional reinsurance sector continues to maintain very strong capital adequacy, robust risk management and generally solid business profiles which help to mitigate the effects of the challenging market conditions.”

Coutts noted substantial loss creep from Typhoon Jebi since that business renewed in April should make Japanese renewals ripe for additional rate increases in April 2020. This is unlikely to impact other lines, given the very strong reinsurance industry capital levels, he said.

He highlighted concerns in casualty, where reserve redundancies and loss severity have resulted in improved terms.

“It remains to be seen whether the rate improvements are sufficient to match the underlying risk,” Coutts warned.

“While pricing generally continues to at least keep pace with loss cost inflation, the underlying loss cost trends are deteriorating, with rising social inflation, a worsening tort environment and weakening liability reserves,” he added.

He predicted such market concerns will compel reinsurers to maintain rational underwriting and manage risk appetite as they push for higher rates and reduced ceding commissions.

Meanwhile, insurance-linked securities (ILS) investors have become more hesitant about investing in the market, and are seeking higher returns given concerns over climate change and loss reporting, said Coutts.

“Assets under management are estimated to have contracted by around $4 billion in Q1 2019, according to Aon Securities,” he said, driven by payment of losses and redemption requests.

“There continues to be some trapped ILS capital following the events from H2 2018 around $15 billion at the end of Q1 2019 and some of these events are continuing to develop adversely,” said Coutts.

“Despite this, inflows of new capital have continued, although at a slower rate.”

Coutts said Fitch expects to affirm the majority of ratings in the global reinsurance sector in 2019 and 2020, unless a very extreme catastrophe event changes their outlook. Most rated reinsurers successfully absorbed above-average catastrophe losses in 2017 and 2018, he concluded.