04 September 2018

Commercial Risk Europe: Fitch expects flat reinsurance renewals but revises sector outlook to stable

Fitch expects most reinsurance renewals to be flat for the remainder of this year and into next as rate increases lose momentum. However, despite this prediction and 2017’s heavy losses, the ratings agency has revised its outlook for the sector to stable from negative, citing more modest but less volatile returns for the market.

In a press briefing Fitch said growth of alternative capital has altered reinsurance market dynamics, making capacity shortages less likely and the underwriting cycle flatter.

Fitch expects alternative capacity will continue to grow, helping keep pressure on reinsurance pricing at upcoming renewals.

“We actually think pricing competition could start to intensify, particularly if we continue to see the benign start to the year continue in terms of losses. We are now in peak hurricane season and so far we haven’t seen anything much yet. If that continued for the rest of the year, we could start to see a return to some quite intense price competition,” said Graham Coutts, director at Fitch.

Mr Coutts explained that rates trended up modestly across most reinsurance lines at last January’s renewals, but momentum was lost throughout the year for most cover outside of loss-affected nat cat business. A key reason for this and expected flat renewals going forward is that alternative capital quickly reloaded.

“Pretty much across the board in January you had rate rises, they were modest but trending up. But by the June/July renewals you started to see prices falling again. Improvement on loss-affected lines has held up pretty well but if you look across the other classes, rate improvements have not been maintained,” said Mr Coutts.

Adding: “The ILS sector saw quite significant losses in 2017, but they were relatively quick to reload their capital and return to the market with increased capacity. In January, they hadn’t had time to reload but as the year progressed, more of the capital was able to return to the market.”

Mr Coutts and Fitch believe alternative capital and the insurance-linked securities (ILS) market “is here to stay and is likely to grow”. The reinsurance business offers diversification benefits, so rising interest rates are therefore unlikely to lead to an exodus of alternative capital, said Fitch.

Mr Coutts noted that ILS investors are quite sophisticated and therefore not scared by the recent losses we have seen. It would likely take several years of losses to have an impact on the ILS market, he argued. Mr Coutts also said cat bonds and ILS capital remain heavily focused on US nat cat risk but are expanding to other geographies and perils, such as motor.

Despite the ratings environment, increased interest from alternative capital and last year’s losses, Fitch has – after five years – revised its reinsurance sector outlook to stable from negative. This is based on its belief that there has been a secular market shift in recent years, and that a “new normal” now exists, with more modest returns but lower volatility.

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