A disciplined approach to pricing is now key for European reinsurers: Fitch

A disciplined approach to pricing is key for European reinsurers as they navigate the challenges of 2020–2021, Robert Mazzuoli, director of EMEA insurance for Fitch Rating told Intelligent Insurer.

Fitch’s current outlook for the global reinsurance sector is negative, while the ratings outlook remains stable, reflecting the fact that Fitch-rated reinsurers are helped by strong capital and are generally well-positioned to absorb pandemic-related losses.

“When you look at the comments of big players it seems that the claims that were booked for COVID-19 in the first half of this year are sufficient, or maybe even conservative in some lines of business,” Mazzuoli said.

“We expect that as long as the situation remains as it is today, with limited lockdowns in certain regions and with certain types of events that are cancelled, the bigger players at least have chosen a prudent approach in booking claims and setting up reserves on a conservative basis,” he explained.

“The investment yield has to be compensated somewhere on the underwriting side.” Robert Mazzuoli

Nevertheless, the element of uncertainty surrounding COVID-19 is a contributory factor to Fitch’s negative outlook for the sector, along with the ongoing issue of social inflation.

On top of that, the sector faces the challenges of climate change-related nat cat events causing heightened losses, set against a backdrop of continuing low investment yields.

Mazzuoli noted two positive points: the hardening of the reinsurance market and the sector’s capital resurgence.

“The hardening market environment is something we haven’t seen for probably 15 years—it started this year, so we expect it to filter through into the 1/1 renewals next year, and then hold for at least 2021,” he said.

“Afterwards it remains to be seen what will happen, because there is no lack of capacity in the market, just a lack of profitability and a heightened amount of volatility.”

He added that the main four European reinsurers are all faring well on a capital basis.

“Earnings-wise we have one outlier, which is Swiss Re,” he added. “When you look at the factors such as nat cat, social inflation, COVID-19, they have taken bigger hits than the other reinsurers; that is why earlier this year we downgraded Swiss Re primarily on the back of poor financial performance.”

Mazzuoli said improvements to prices (on a risk-adjusted basis) and terms and conditions are expected to continue in January; what happens beyond that depends on known unknowns such as what will happen with COVID-19 and whether there will be renewed interest from the alternative capital space.

“At the moment we see good inflows into insurance-linked securities but not on the collateralised side, so to some extent we have to see how much capital flows into the market and how aggressive certain players are,” he said.

On the topic of low returns on capital, he noted that for the past few years with the exception of 2019 the sector as a whole did not make good returns on invested capital, and both this and next year are looking doubtful too.

“We have established an estimate for the return in capital that falls slightly short of the cost of capital, so the challenge for the industry is to be disciplined on the pricing,” he said. “There are certainly lines where they are probably already there, but there are others where further price increases are needed. The investment yield has to be compensated somewhere on the underwriting side.”

He added that the return on capital is not expected to be above the cost of capital until 2022 at the earliest.

“It is very important to remain disciplined, and that in the end means not giving away capacity too easily.

“Let’s see whether that discipline holds, because there is no lack of capital in the market. It is an exercise of discipline, not something that will happen automatically,” he concluded.