Reinsurance market to soften further despite Harvey and tough underlying conditions

Ratings agencies do not expect soft global reinsurance market conditions to harden because of Hurricane Harvey or continued weak underlying operating conditions at upcoming renewals. In a series of reports published ahead of the Rendez-Vous de Septembre in Monte Carlo next week, Fitch, S&P and AM Best did not change their rating outlook on the reinsurance sector. But negative rating actions are possible if pressure continues to mount on reinsurers and the market fails to turn. According to Taoufik Gharib, an analyst at S&P, Hurricane Harvey is unlikely to affect global reinsurance capital, which reached a record $605bn at the end of Q1 2017. Therefore, he does not expect Harvey to change broad reins-urance pricing at a global level. The hurricane could lead to a hardening of rate in loss affected lines of business, but this could be limited to the US, according to another S&P analyst Johannes Bender. Energy, commercial property and business interruption have all been affected and could see price increases, he said. Catastrophe losses in the first half of 2017 were below average and Fitch said this will help the reinsurance sector absorb Hurricane Harvey-related losses in the second half of the year. “These losses are unlikely to be enough to affect pricing outside of directly affected areas, and overall we expect Hurricane Harvey’s impact on reinsurers to be manageable as insured losses may largely fall on primary insurers,” states Fitch. “But the storm may leave some reinsurers close to exhausting their catastrophe budgets for the year, meaning even marginally higher catastrophe losses in the remainder of 2017 could put significant pressure on their profitability.” Fitch expects pricing in the global reinsurance sector to continue to decline in 2018 and believes a floor has yet to be reached. Its outlook for the sector remains negative as profits remain under further pressure from falling prices and low investment yields. Fitch does not expect any significant impact on reinsurance ratings during the next 12 to 18 months, thanks to strong capitalisation across the sector. But, it notes: “Headroom is shrinking, especially following Hurricane Harvey, and a further deterioration in profit metrics beyond our current expectations could lead to negative rating action.” AM Best is concerned that despite poor underwriting performance last year, the reinsurance market shows no sign of hardening and therefore runs the risk of rating downgrades. In its report, the ratings agency explains that the reinsurance industry recorded accident year underwriting losses in 2016 for the first time in ten years, barring 2011 when major catastrophe losses were to blame. Yet the market still will not shift to deliver respite for reinsurers. The reinsurance sector has held a negative rating outlook with AM Best since August 2014. Without any improvement in market conditions the ratings agency believes this “eventually may translate into negative rating pressures”. “If the reinsurance market is booking the accident year combined ratio at a loss in a relatively benign catastrophe year, and that in and of itself is not the impetus for change, the next logical question is: What will it take to turn the market?” asks Robert DeRose, senior director at AM Best. “At this point, it does not appear that the lack of underwriting profit in the current book or continued erosion in return on equity will break the cycle,” he adds. S&P has maintained a stable ratings outlook on the reinsurance sector, driven by the industry’s capital strength and strong enterprise risk management. However, S&P notes that the market is characterised by weak business conditions, even before this year’s hurricane season. There are no positive ratings drivers for the global reinsurance sector, according to S&P. Pricing pressure is ongoing with decreases of up to 5% expected into 2018, and alternative capital continues to flow into the reinsurance market. “The length and depth of the current soft pricing cycle have surprised many market participants; these declines are primarily attributable to an abundance of reinsurance capacity and multiple successive years of modest insured losses,” S&P states in its annual reinsurance report published this week. “Furthermore, competitive pressures in the industry remain fierce, as cheaper alternative capital sources continue to enter the market and crowd out the traditional players, especially in lines exposed to natural catastrophes,” it adds.

Reinsurance market to soften further despite Harvey and tough underlying conditions

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