The current hardening environment and rising prices, coupled with stabilising losses related to the ongoing COVID-19 pandemic, has led Fitch Ratings to revise its sector outlook for global reinsurance in 2021 to stable.
After turning negative on the segment back in March, the ratings agency maintained its negative outlook for global reinsurance in 2021 as recently as September, citing COVID-19 losses, the global economic contraction, and persistently low interest rates.
While the lower for longer interest rate environment remains and asset quality continues to deteriorate, driving reduced investment income for reinsurers, the stabilisation of pandemic-related losses and hardening pricing conditions has pushed Fitch to revise its outlook upwards to stable for the coming year.
“The sector outlook is based on an updated definition employed by Fitch, which considers underlying fundamentals expected in 2021 relative to actual fundamentals in 2020,” explains the ratings agency.
According to Fitch, the underlying fundamentals of major developed non-life primary insurance markets are expected to stabilise next year, noting that this is the main source of business for reinsurers.
Rates in the reinsurance market started to trend more favourably at the January 1st, 2020 renewals and in the aftermath of the pandemic, continued to gain momentum throughout the year.
The current market hardening is anticipated to persist at the upcoming Jan 1st, 2021 renewals and beyond, and combined with an expectation of heightened demand for coverage, should present reinsurers with an opportunity to take advantage of profitable growth after some challenging years.
Fitch also highlights that the capital strength of the global reinsurance sector has, in spite of COVID-19, remained largely unscathed owing to capital raises and also the fast recovery of financial markets from the lows of spring.
Looking forward, Fitch expects to see fewer pandemic claims as reinsurers look to tighten terms and conditions, with a notable focus on wordings and exclusions to avoid potential losses in the future.
“Nevertheless, the uncertainty around ultimate losses from the pandemic remains high,” continues Fitch.
While underwriting results are predicted to improve in 2021, the extremely low interest rate environment means that gains made on the liability side of the balance sheet will likely be somewhat offset by pressure on reinsurers’ investment income.
“Moreover,” says Fitch, “a weak economic recovery could foster a deterioration in asset quality, to the detriment of the sector’s profitability. Lower investment income may motivate reinsurers to maintain underwriting discipline and push up prices, but competitive forces could ultimately thwart these aims.”
