Fitch: Reinsurers battling profit deterioration

Reinsurers’ profitability is being threatened by pricing as combined ratios suggest that the industry is getting close to reporting underwriting losses, according to Fitch Ratings.

The rating agency said that a growing number of traditional reinsurers have been trying to escape rate pressure in property lines by moving into casualty. As a result, price declines in casualty are set to accelerate.

Fitch expects the reinsurance sector’s 2017 calendar year combined ratio to deteriorate to 99.2 percent compared with a forecast 94.2 percent in 2016 and an actual 86.8 percent in 2015, according the agency’s “2017 Outlook: Global Reinsurance” report. Driving this deterioration is pressure on underwriting profitability with reinsurers’ plight made even worse by pressure on investment returns which have been plagued by historically low interest rate levels.

The reinsurance industry has been facing a soft market for some time as a low interest rate environment has also increasingly attracted investors and so-called alternative capital to the industry, causing overcapacity and price deterioration. The absence of large losses has also contributed to the current soft market making it tricky for reinsurers to argue the case for rate hikes.

On a positive note, price deterioration has slowed recently. “The January renewals support the general market view that the overall reinsurance price reductions are slowing,” Fitch director Graham Coutts, said at the agency’s Jan. 26 Insurance Roadshow 2017 in London.

But the slowing rate of price reductions will have limited significance in improving near-term profitability, according to Coutts’ presentation.

And it would probably need an extremely high loss of $100 billion or more to reverse the trend, Coutts suggested.

“The greater declines have been seen on the non-proportional lines of business rather than proportional lines,” he noted.

Surplus of reinsurance capacity will create further downward pressure on premium prices, according to the presentation.

In addition to pricing pressure, there is also evidence of some weakening in terms and conditions such as multi-year covers, Coutts continued.

Casualty rates have held up slightly better over the recent years than property lines, but as reinsurers move into this market in search for better margins, this capacity increase is expected to add pressure on pricing.

Rates in casualty lines have held up better, partially because of slower growth of alternative capital due to the longer duration of the risk as well as the fact that it is less well modelled than the property side of the business, Coutts explained.

He noted that the combined ratios of large European reinsurers, normalized for average cat losses and reserve releases, are already approaching 100 percent.

Going forward, quality of earnings is expected to deteriorate as underwriting margins and investment returns continue to fall; smaller companies with limited diversification are at greatest risk of negative rating action, according to Fitch.