Fitch has said that the outlook for the global reinsurance sector for 2021 remains negative, amid growing COVID-19 losses, the global economic contraction, and the lower for longer interest rate environment.
The ratings agency’s outlook for the global reinsurance industry turned negative back in March, and while reinsurance companies are expected to be able to manage the impacts, the outlook remains unchanged.
Fitch cites “mounting losses” from the ongoing pandemic, the effect of the “global economic contraction on premium volumes”, and also the fact that “ultra-low interest rates” will hinder the performance on the asset side of the balance sheet.
Despite these challenges, of which the extent remains uncertain, reinsurers rated by Fitch are generally well placed to absorb losses from the pandemic, helped in part by strong capital levels.
It’s been reported widely that while the current crisis is clearly a challenge and is hitting underwriting and investments, it’s expected to be an earnings event rather than a capital event for market participants.
As a result, Fitch says that it’s likely that over the next year, most rating actions will be affirmations, barring an extreme catastrophe event in the second-half of the year, or a severe deterioration of the COVID-19 pandemic.
“The sector’s 1H20 results highlighted that the ultimate amount of insured losses from the coronavirus pandemic remains highly uncertain and may not be fully reflected in reinsurers’ reserves,” says Fitch.
As highlighted by Fitch, most claims reserves booked in H1 2020 were incurred but not reported, and the reality is that it could take a very long time for the ultimate loss to be understood, with many claims likely to be long-tail.
Fitch also notes the resilience of traditional reinsurance capital in the first six months of the year, which fell by only 3%, according to Willis Re, despite COVID-19 losses and financial market turmoil.
Additionally, Fitch notes that price increases have accelerated since the outbreak of the coronavirus, a trend Fitch expects to continue into 2021.
“Even before the pandemic, insurers and reinsurers would have had to increase prices to reflect higher natural catastrophe claims and doubts over reserve adequacy in light of growing loss severity for US casualty insurance,” says Fitch.
For 2020, Fitch expects the global reinsurance sector to report a calendar-year combined ratio of 105.8% and an accident-year combined ratio of 106.6%, compared with 101% and 103.4% in 2019, respectively.
For 2021, Fitch predicts the industry to record a calendar-year combined ratio of 101% and an accident-year combined ratio of 101%.
On the non-life side, Fitch anticipates that its rated-reinsurers will book COVID-19-related loss of $9.3 billion in 2020 and losses of $1 billion in 2021. Catastrophe losses are projected to hit $8.85 billion in 2020, against $12.15 billion in 2019.
