Fitch sees stable outlook for reinsurance sector in 2021

Hardening pricing conditions and stabilising pandemic-related claims are the factors behind Fitch Ratings’ stable sector outlook for global reinsurance in 2021. However, the ratings agency also pointed to depressed investment income due to ultra-low interest rates and deteriorating asset quality. Fitch said the sector outlook also reflects its expectation that the underlying fundamentals of major developed non-life primary insurance markets, the main source of business for reinsurers, will stabilise in 2021. Fitch’s sector outlooks for major developed non-life primary insurance markets in 2021 are stable or improving. “This reflects our view that most pandemic-related claims will be reserved for in 2020, meaning that these markets' claim levels should normalise in 2021. We expect rate increases in several key lines to take firmer hold in 2021, but economic pressures will dampen primary insurers' premium revenue and could weaken their asset quality. The global reinsurance sector is closely linked to these markets through quota-share treaties,” said Fitch. It noted that the reinsurance industry began to raise prices due to higher natural catastrophe claims and concerns over reserve adequacy and loss severity for US casualty business in January 2020. It said price increases have gained momentum through the various renewal seasons since the onset of the pandemic and expects the hardening market to continue into 2021. “Demand for reinsurance is likely to increase due to heightened uncertainty linked to the pandemic and primary insurers' stronger ability to purchase reinsurance given increases in their own pricing,” said Fitch. “The sector's capital strength has remained largely unscathed despite substantial pandemic-related underwriting losses in several segments, including contingency/event cancellation, travel, trade credit and surety, business interruption and mortality. This was achieved thanks to a series of capital increases and the recovery of financial markets from the lows recorded in spring this year.” Fitch said the uncertainty around ultimate losses from the pandemic remains high, but believed that changes in reinsurance terms and conditions, notably the exclusion of pandemic cover in new and renewed contracts, should progressively reduce the potential for future property and casualty reinsurance claims stemming from the pandemic. As for investment income, Fitch noted that reinvestment rates are well below the running yields on reinsurers' investment portfolios, and are continuing to fall. “The resulting pressure on reinsurers' investment income will erode some of the likely increase in underwriting income in 2021. Moreover, 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,” it said.

Fitch sees stable outlook for reinsurance sector in 2021

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