Fitch Ratings has maintained its negative outlook for the global reinsurance sector in light of ongoing competition, low interest rates and the influx of alternative capital, but does state that profitability is likely to improve for the industry in 2018.
The ratings agency expects reinsurer profitability to improve in 2018, driven by normalised catastrophe losses and improved pricing as a result of the high level of catastrophe losses experienced in 2017.
Fitch expects the underlying accident-year reinsurance combined ratio, excluding catastrophes, to improve to 92.1% this year, from 92.6% in 2017. At the same time, Fitch said the sector’s return on equity (ROE) should also improve in 2018, driven by “modest growth in equity capital levels and an improvement in underwriting results.”
Despite noted rate increases across the reinsurance sector so far in 2018, Fitch believes these improvements may not be sustainable, underlined by the softness of April renewals and which is hindered by the persistent flow of alternative reinsurance capital.
“The influx of alternative capital (the additional capacity being provided by capital market investors willing to accept lower prices for catastrophic risk) limits cyclical price rebounds historically seen after periods of severe catastrophe losses,” said Fitch.
Despite maintaining its negative outlook for the reinsurance sector, Fitch’s ratings for the global reinsurance sector remain stable, “as strong capitalization of most rated entities should allow Fitch to affirm the majority of its ratings over the next 12 to 18 months.”