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Return on capital to improve for reinsurers but price improvements to fade: Fitch

14th January 2021 - Author: Luke Gallin

Although Fitch Ratings expects the return on capital of the reinsurance sector to improve notably in 2021, analysts warn that price improvements are likely to “gradually fade” over the next 12-18 months on the back of ample capital and an elevated risk appetite.

As expected, the reinsurance market continued to firm at the important January 1st, 2021 renewals as losses from the pandemic and catastrophe events, social inflation impacts and the lower for longer interest rate environment contributed to a renewed focus on underwriting.

According to Fitch, “widespread price increases that often went beyond claims inflation” were evident at 1/1. But despite this, analysts note that rate improvements were limited by abundant levels of capital in the market, from both existing and new players.

As Fitch highlights, “The most important objective for reinsurers is to re-establish profitability after several years of sub-par returns on capital.” Of course, pressure on the asset side of the balance sheet amid low interest rates has exacerbated the problem for reinsurers, and in response, there’s been a heightened focus on underwriting profitability to improve margins.

In 2021, Fitch expects that real price improvements will come in at around 2% – 4%, which, assuming a normalised level of catastrophe losses, would drive better technical results for companies.

“Fitch expects the return on capital of the reinsurance sector to improve significantly in 2021 compared to the low-single-digit return forecast for 2020, but to remain slightly shy of the industry’s cost of capital,” note analysts.

Going forward, it’s expected that losses related to the coronavirus pandemic will diminish as the vaccine rollout accelerates around the world and lockdowns are relaxed. This, coupled with improved underwriting margins will undoubtedly help the reinsurance sector, but it’s assumed that some of this improvement will be consumed by worsening asset quality.

The twin impacts of COVID-19 and an active year for catastrophe events, at a time when the market was already firming following a prolonged soft market, led sector participants to debate how sustainable rate improvements might be.

According to Fitch, rate improvements will dwindle over the next 12 – 18 months as the risk appetite in the industry grows and capital levels remain high. This prediction is based on a normal large loss experience and the successful rollout of the vaccine to mitigate the spread of the virus.

All in all, Fitch is maintaining its stable sector outlook for global reinsurance, which reflects the hardening marketplace, a robust capital position, and an expected decrease in claims related to the pandemic.

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