In light of catastrophe losses experienced in the second-half of 2017, Fitch Ratings has maintained its negative outlook for the reinsurance sector, while the majority of reinsurer rating outlooks remain stable.
As the January 1st, 2018 renewals fast approach, global reinsurance companies are expecting rate increases to improve the profitability of the industry after years of falling rates and deteriorating margins, driven by the high level of cat losses in the third-quarter, and the recent California wildfires.
“Fitch’s fundamental outlook for the reinsurance sector remains negative. Intense market competition and the endurance of alternative capital have depressed prices in recent years. Low investment yields, which Fitch expects to persist, put further strain on reinsurer profitability,” said the ratings agency, in its 2018 Global Reinsurance Outlook.
Ultimately, warned Fitch, the profitability of the reinsurance sector remains under pressure, and the ratings agency stressed that significant development in loss estimates or further large loss events in the remainder of 2017, could change the sector’s rating outlook to negative from its current stable status.
According to Fitch, third-quarter 2017 catastrophe losses will drive the reinsurance sector to an underwriting loss for the year, with an aggregate combined ratio of nearly 110% for Fitch’s group of monitored reinsurance companies, its weakest level since 2011 (112.9%).
However, for 2018 Fitch expects underlying underwriting results to improve, forecasting a calendar-year combined ratio of 95.8%, which reflects an average level of cat losses impacting the combined ratio by eight points, compared with 22 points in 2017.
Recent market conditions have resulted in many reinsurers being strongly capitalised, which meant the industry held substantial excess capacity and is well equipped to absorb recent losses, with many companies in a good position to take advantage of rate increases at 1/1, which Fitch said will be influenced by alternative capital.
Like other industry observers and analysts, Fitch anticipates loss-affected lines to experience the most significant rate increases at renewals, and also believes recent events will drive increased demand for reinsurance protection.
“This increase in demand in combination with a potential constraint in supply is likely to contribute towards an improvement in rates across US catastrophe-exposed lines of business, which may also extend to non-US or non-catastrophe-exposed lines,” said Fitch.
