Fitch says reinsurance price increases will slow in 2013 as capacity rises

In its 2013 Outlook: Global Reinsurance publication the rating agency said that current pricing remains adequate to support profitability across most reinsurance classes but that earnings pressure will return next year. Fitch anticipates further strengthening of the sector’s ‘already strong’ capitalisation and continued premium growth as the year develops, with its outlook for the global reinsurance sector remaining stable. With supply expected to outstrip demand in 2013 Fitch expects a reduced level of overall price increase at the key January 1 renewal, compared with that achieved at the same time last year, despite the prospect of a reduction in the overall rate increase achieved on renewed portfolios.hideThis reflects an increased effort by reinsurers to segment the market and tailor price changes based on individual risk profiles, following the sizable ceded losses in 2011. Even with the expectation of slowing price increases, Fitch considers that pricing across most reinsurance lines remains adequate. The agency currently views casualty classes as being most exposed to inadequate pricing. “The unprecedented level of catastrophe losses incurred by the sector during 2011 was insufficient to yield a market-wide hardening of premium rates. The currently fragmented nature of pricing outcomes is expected to continue into 2013, reflecting the differing bargaining strength between reinsurance purchasers and sellers within individual markets and reinsurance classes,” said Fitch. According to the rating agency, reinsurance pricing momentum started ‘very strongly’ at the January 1 2012 renewals, during which rate on line (defined as premium divided by contract limit) increased by 9.5%, following a 7.5% decline in 2011. This improvement was the first annual rise in rates since January 2009, following the industry-wide catastrophic events of 2008. Property rate increases appear to have peaked as reinsurer capital continues to strengthen with below-average catastrophe losses thus far in 2012, said Fitch. Property retrocession continues to show the most favourable upward pricing momentum, with 2012 mid-year renewal rate increases that were closely in line with levels experienced at the January 2012 renewals. This trend is being driven by reinsurers as they hold back capacity with an expectation to only deploy it at attractive pricing levels, explained the rating agency. Casualty pricing has been flat to only slightly positive, despite the continued low investment yields that make adequate returns difficult to achieve. Fitch does not foresee a casualty market turn in the near term, barring significant loss events or a spike in interest rates that causes a sizable loss in capital from declines in fixed-income investment values. But Fitch expects reinsurers to maintain underwriting discipline in 2013 as they continue to be cautious after the high losses of 2011 and uncertainty continues about the global macroeconomic outlook. The high cost and difficulty of replacing lost capital are also likely to reinforce caution among reinsurers, said the rating agency. “A further catastrophic loss coupled with an inability for reinsurers to replenish lost capital is the most likely threat to the sector’s stable outlook at this time,” said Martyn Street, Director in Fitch’s EMEA rating group. “Historically, this has been a rare combination.” A single loss event of $60bn would be likely to trigger a sector outlook revision, in Fitch’s view. This estimate has been revised upwards from $50bn, reflecting the strengthening of the sector’s capitalisation. Fitch expects reserves to develop favourably for most classes, but the level of surplus generated by prior years is expected to decline somewhat, which will add pressure to run rate profitability. “While 2012 earnings are likely to improve, low investment yields and questions over the sustainability of prior-year reserve surpluses will make it more challenging for reinsurers to maintain profitability levels in 2013,” said Chris Waterman, Managing Director in Fitch’s EMEA Insurance rating group. While near-term earnings uncertainty continues to recede for the reinsurance industry, in contrast to 2011, the persistence of low investment yields and sustainability of prior-year reserve surpluses are expected to make it more challenging for reinsurers to maintain similar profitability levels in 2013, added Fitch.

Fitch says reinsurance price increases will slow in 2013 as capacity rises

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