On a normalised basis major European reinsurers combined ratios were over 100% last year, but industry players benefitted from unusually favourable circumstances with lower-than-expected major losses and large prior year reserve releases meaning carriers maintained resilience in a tough market, according to Fitch.
This normalised combined ratio rate of over 100% means under normal circumstances, the industry would have been beset with losses – indicating continued deterioration in market conditions, where pressure on premium rates has left reinsurers struggling to maintain profitability.
Commercial lines reinsurance rates continued to decline into the start of 2017 for property and casualty sectors in Europe, said Fitch.
The U.S. experienced somewhat easier market conditions with only moderate rate declines in P&C; developing markets of China, the Middle East, and Africa saw larger price reductions.
Fitch said low rates of underwriting growth throughout Europe indicated a disciplined market, with major European reinsurers riding out the storm with selective underwriting in target markets and strategic investment management.
But despite maintaining discipline, major firms would still have been subject to underwriting losses in a normal operating environment, demonstrating just how tough the European industry has become.
According to Fitch, on a normalised basis reinsurer Hannover Re’s combined ratio in 2016 was 103.8%, compared to its reported 93.7%. For Munich Re, on a normalised basis, the combined ratio also exceeded 100% in 2016, at 100.8% compared with a reported 95.7%.
While for both Swiss Re and SCOR, on a normalised basis, combined ratios stayed below 100% in 2016, at 99.8% compared with a reported 93.5%, and 94.4% compared with a reported 93.1%, respectively.
The continued hurdles reinsurers have been left to jump through have shown some initial signs of dissipating; Fitch said some market sectors were already experiencing a drop in the rate of price declines and price flattening.
The European market could also benefit from “growth in demand for structured reinsurance solutions,” Fitch said, as Solvency II requirements could push insurers to strengthen capital positions with higher levels of risk transfer.
Fitch commented that; “counterparty-default capital charges under S2 will often be lower when transferring risk to one or two very highly rated reinsurers than they would be for transferring the risk to a larger diversified pool of reinsurers with lower credit ratings,” meaning well-established reinsurers are well positioned to benefit from S2 requirements for primary insurers and could be on the upswing in coming years if the flattening price trend continues as predicted.
With the ongoing pressures in the global reinsurance market, the profitability of major players in Europe, and elsewhere around the world, will remained under strain; and absent a truly market changing event, it’s likely firms will continue to rely on reserves and lower-than-expected losses for profitability in the coming months.