Analysts at Fitch Ratings are forecasting significant improvements in reinsurers’ financial performances next year due to higher prices in a hardening market, a strong rebound in economic activity and lower pandemic-related losses.
The rating agency says these positive factors should outweigh the negative effects of declining investment returns, increasing natural catastrophe claims due to climate change, and a temporary pick-up in inflation.
Accordingly, Fitch expects to affirm most reinsurers’ ratings in 2021 and into 2022.
These comments follow news from Moody’s, which has decided to change its outlook on the global reinsurance sector from negative to stable, as prices continue to increase amid a global economic rebound.
Fitch likewise believes that reinsurers have generally proven to be well-positioned to absorb pandemic-related losses so far, and uncertainty over the ultimate losses is diminishing for several reasons.
Firstly, the progress on vaccination, particularly in Europe and North America, has reduced the risk of excess mortality claims in life reinsurance, despite the spread of the Delta variant.
Secondly, analysts assert that infectious disease exclusions in renewed contingency and business-interruption treaties have mostly eliminated the risk of new pandemic-related claims from these business lines.
And finally, the business-interruption losses reported so far in 2021 have been within expectations factored into incurred-but-not-reported claims reserves set aside in 2020.
Fitch expects the reinsurance sector’s combined ratio to improve by two to three percentage points in 2021 and another one to two points in 2022 as price increases gradually feed into underwriting margins.
However, the firm warns that price rises are slowing due to strong capital supply and recovering profitability, and thus risk-adjusted prices are expected to to remain largely unchanged in 2022.
Some additional points of note for the sector going into 2022 are the tightening of reinsurance terms and conditions, analysts added, as infectious disease and silent cyber coverage have been excluded from many renewed treaties.
Renewals are also starting to be affected by ESG considerations, with some reinsurers reducing or withdrawing facultative reinsurance cover related to fossil fuels.