Reinsurer return on capital to 'improve significantly' in 2021, says Fitch

Analysts at Fitch Ratings have forecast that the return on capital of the reinsurance sector is expected to "improve significantly" in 2021.

The reinsurance market continued to harden at the January 2021 renewals as pandemic-related claims, high natural catastrophe losses and pressure on liability lines of business due to social inflation and lower interest rates led to widespread price increases that often went beyond claims inflation, the agency said in its new report.

Prices hardened in all major lines of reinsurance business and geographies for excess-of-loss treaties, while ceding commissions paid for quota-share treaties declined. Those reinsurers with a large proportional book also benefited from substantial primary rate improvements.

Fitch, however, noted that "these improvements were capped by abundant capital in the market".

Despite heavy losses caused by COVID-19 and natural catastrophes, both traditional and alternative reinsurance capital remained largely unchanged during 2020. The report found that capital injections of over $20 billion and a recovery in financial markets helped to maintain the reinsurance capacity at the levels of early 2020.

For 2021, Fitch expects the real price improvements to be around 2–4 percent, assuming a normalised natural catastrophe claims level.

Overall, 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 short of the industry’s cost of capital.