Alternative capital growth to further depress reinsurance rates in 2018

Reinsurance rates are set to continue to decline in 2018 as growth in alternative forms of reinsurance intensifies the competition for business, Fitch Ratings said on Sept. 5.

This competition will mainly be driven by the collateralised reinsurance segment, where funds are likely to expand their reinsurance capacity at lower pricing margins. Market conditions for catastrophe bond issuance are also likely to remain favourable in 2018 as investors seek to diversify risks.

Declining rates, paired with low investment yields are set to further increase pressure on reinsurers’ profits in 2018, according to Fitch.

Reinsurance catastrophe losses were below average in the first half of 2017, which will help the sector absorb Hurricane Harvey-related losses in the second half of the year. These losses are unlikely to be enough to affect pricing outside of directly affected areas, and overall, Fitch expects Hurricane Harvey's impact on reinsurers to be manageable as insured losses may largely fall on primary insurers.

But the storm may leave some reinsurers close to exhausting their catastrophe budgets for the year, meaning even marginally higher catastrophe losses in the remainder of 2017 could put significant pressure on their profitability. This could, in turn, put pressure on ratings, as the continued erosion in profitability in recent years has left little scope for a further deterioration in key metrics at current ratings.

Combined with low investment yields, which are likely to persist in 2018, the significant decline in premium rates over the last few years has made it harder for reinsurers to write business at a profit margin that exceeds their cost of capital, Fitch said. Reinsurers’ ability to use prior-year reserves to mitigate the pressure on operating profit is also dwindling, and Fitch does not expect firms to be able to maintain reserve releases at their current levels in the medium term.

The group of reinsurers monitored by Fitch is estimated to record a combined ratio of 96.9 percent and an operating ratio of 89.9 percent in 2018. But if these calendar-year ratios were to rise to more than 100 percent and 90 percent respectively in the medium term, this could result in the rating outlook on the sector turning from stable to negative, Fitch warned.

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