Fitch Ratings has revised down its global reinsurance and London market sector outlooks to neutral from improving, a move the ratings agency says reflects increased risks from rising claims inflation, financial market volatility, and weakening price momentum.
The rating agency last updated the outlooks in 2021, and at this time, expected higher premium rates and a strong rebound in economic activity to significantly improve financial performance.
Although premium rates are still on the up, they have started to decelerate. However, Fitch still expects both markets to report strong profit in 2022, but no longer expects financial performance to improve significantly as it believes it will be very difficult for companies to achieve above-inflation premium increases.
Analysts at the agency noted that the Russia–Ukraine war has exacerbated some of the negative macro-economic trends affecting reinsurers and the London market. Rising inflation, which was already pushing up claims costs, has clearly accelerated.
“Increased financial market volatility has led to higher regulatory capital requirements and – in some cases – to investment losses due to wider credit spreads and lower equity valuations. Pressure on economic growth could dampen demand for insurance and reinsurance cover,” says Fitch.
Adding, “Short-tail business lines are already being affected by higher claims inflation, with repair costs for buildings and vehicles rising fast. Insurers and reinsurers may be able to increase premiums accordingly, but as high inflation becomes longer-lasting, reserve deficiencies will start to arise on long-tail lines.”
Furthermore, warns Fitch, claims linked to wages and healthcare costs are increasing, as are litigation costs, with re/insurers expected to have to set aside higher provisions to cover this.
While the ultimate cost of the war in Ukraine is unknown, for both the global reinsurance market and the London market, Fitch says it represents a mid-sized catastrophe event, mostly affecting specialty lines.
“In most cases, we expect insurers and reinsurers to suffer only a hit to earnings, rather than capital depletion, and we do not expect material ratings implications,” says Fitch.
However, Fitch believes that there is still the potential for the frequency and severity of natural catastrophe losses to remain higher and reduce market profitability.
According to analysts, several factors should protect global reinsurers’ and London market insurers’ credit profiles against rising claims inflation, financial market volatility and weakening price momentum, supporting the agency’s neutral sector outlooks.
Fitch notes that capitalisation remains very strong, having recovered from the pandemic losses of 2020. And, importantly, underwriting disciplined has been maintained.
“Over time, higher interest rates to counter high inflation could lead to increased investment income, partially offsetting the effect of claims inflation on insurers’ and reinsurers’ overall profitability,” concludes Fitch.
