11 September 2017 Insurance

Hard times for global reinsurance sector

Rating agency Fitch has said its outlook for the global reinsurance sector in 2018 remains negative as falling prices and low investment yields put pressure on profits.

Fitch’s announcement came at its annual pre-Monte Carlo briefing in London, ahead of its main presentation at the conference itself.

According to Graham Coutts, director at Fitch, strong capitalisation across the sector means that Fitch does not expect any significant impact on ratings over the next 12 to 18 months. However, he added, headroom is shrinking—especially following recent hurricanes—and a further deterioration in profit metrics beyond Fitch’s current expectations could lead to negative rating action.

Coutts said that he expects pricing to continue to decline in 2018 as growth in alternative forms of reinsurance intensifies the competition for business. He stated that this will mainly be driven by the collateralised reinsurance segment, where funds are likely to expand their reinsurance capacity at lower pricing margins.

According to Fitch, market conditions for catastrophe bond issuance are also likely to remain favourable in 2018 as investors seek to diversify risks. Reinsurance catastrophe losses were below average in the first half of 2017, which will help the sector absorb hurricane-related losses in the second half of the year.

However, higher catastrophe losses in the remainder of 2017 could put significant pressure on their profitability.

This could in turn put pressure on ratings, as the continued erosion in profitability in recent years has left little scope for a further deterioration in key metrics at current ratings.

Combined with low investment yields, which according to Coutts are likely to persist in 2018, the significant decline in premium rates over the last few years has made it harder for reinsurers to write business at a profit margin that exceeds their cost of capital.

Their ability to use prior-year reserves to reduce the pressure on operating profit is also dwindling, and Fitch does not expect firms to be able to maintain reserve releases at their current levels in the medium term.

Coutts said that he expects Fitch’s monitored universe of reinsurers to achieve a combined ratio of 96.9 percent and an operating ratio of 89.9 percent in 2018. But if these calendar-year ratios were to rise to more than 100 percent and 90 percent respectively in the medium term, this could result in the rating outlook on the sector turning negative.

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