The big four European reinsurance firms are successfully resisting the temptation to compete on price alone, according to rating agency Fitch, which is providing them with a competitive advantage in the marketplace.
Pricing discipline displayed by the four largest reinsurance firms in Europe, Munich Re, Swiss Re, Hannover Re and SCOR, is “proving an important competitive advantage in the face of declining market pricing and investment yields,” Fitch Ratings said today.
Fitch believes that the big four reinsurers have been able to leverage their scale and strong market positions to maintain their pricing and renewal terms, better than smaller reinsurers have been able, allowing them to cushion their earnings without suffering a significant fall in business volumes.
However, Fitch notes that the fact these reinsurers have been able to report strong underwriting results still cannot be relied upon to continue, as the effects of the soft reinsurance market begin to bite and the benefits of lower than expected losses and high reserve releases may not persist.
Fitch expects a gradual shift further away from property and casualty reinsurance, something evident in the recent results, with more of the big four reinsurers profits likely to come from life reinsurance and longevity risks.
SCOR in particular is noted for its build-out of a larger life reinsurance business, after the reinsurer made two major acquisitions in recent years.
This discipline has helped to mute the effects of the soft reinsurance market in these larger reinsurers results, but the effects are evident and likely to become increasingly so the longer it persists.
While resisting the temptation to compete on price in some markets, it has to be said that the big four reinsurers are among the most competitive in emerging markets, such as Asia-Pacific, where they can wield their global diversification to great effect.
In some of these emerging markets, and even in continental Europe where they are dominant, these major reinsurers are often the cheapest capacity in the market and take large slices of risk from programmes.
Only time will tell whether this is disciplined underwriting, or not. But their aggressive moves in some markets have resulted in them becoming increasingly dominant there.
Fitch says that pricing remains “under intense pressure” and that its Fitch-calculated combined ratio, excluding the impact of prior-year reserve releases and lower-than-expected major losses, was close to 100% in aggregate in 2016 even for these four major European reinsurers.
This indicates that things are getting any easier and that underwriting profits are in reality little better than break-even.
As a result, Fitch Ratings said its fundamental outlook for the reinsurance sector is negative and the rating agency believes that profitability will weaken further, as renewal pricing and investment yields continue to decline.
