Price pressure an ongoing threat for London re/insurance market: Fitch

by Artemis on February 10, 2016

Pricing pressure is the main and ongoing threat for the London insurance and reinsurance market, according to Fitch Ratings, with continued declines expected across both catastrophe and non-catastrophe lines of business.

Following on from the key January 1st renewal period, Fitch Ratings has provided an outlook for the London insurance and reinsurance marketplace, with further pressure on pricing remaining the main threat to London market participants.

“In particular, we do not believe that a price floor has been reached in reinsurance and expect further declines in pricing adequacy,” says Fitch.

As a result of further pressure on rates across the majority of business lines in the London market, Fitch expects “the London market’s attritional loss ratio to deteriorate from 52% in 2014 to 54% in 2016.”

The ratings agency predicts a “significant proportion” of insurance and reinsurance business lines to experience further rate declines in the coming months, highlighting casualty re/insurance lines.

Despite Fitch noting that a pricing floor is yet to be reached in the re/insurance market, the highly competitive property catastrophe space has witnessed declines for a prolonged period now, exacerbated by ample capacity from both traditional and alternative sources and the continued benign loss environment.

As profitability in the property cat space becomes ever-more challenging, falling to levels where even the largest reinsurers could struggle to meet their cost-of-capital requirements, it’s expected that reinsurers will increasingly pull-back on these business lines, and look to deploy more capacity into the casualty space where returns might be more desirable.

Fitch highlights this point; “In reinsurance classes, which accounted for 34% of premium in 2014, we expect casualty rates to fall further in 2016 as reinsurers shift capacity from property-catastrophe lines, where profit margins are perceived to have narrowed.”

Adding that reinsurers expected growth in the casualty space would likely also be driven by its diversification benefits.

Fitch predicts that the “weak trading environment” witnessed in recent times will likely continue throughout 2016, “but there have been recent signs that the speed of rate decreases may be slowing and there have been small rate increases in some classes, particularly on specialty lines,” says Fitch.

The final point raised by Fitch here is an interesting one, as numerous other industry experts, analysts, and executives noted increased pressure on specialty lines at 1/1, and in particular within the London marketplace.

Other trends the ratings agency expects to see through 2016 in the London insurance and reinsurance sector is continued merger and acquisition (M&A) activity, as smaller players look to increase scale and efficiency, and Asian investors look to grow their positions in new regions and re/insurance business lines.

Finally, Fitch underlines that capitalisation in the London market is currently at record levels, driven by a lack of large, costly catastrophe events, and evidenced by the “highest ever absolute amount of capital but also by a declining underwriting leverage ratio.”

As a result, and in spite of the continued pressure on pricing, Fitch expects the majority of London market business lines to remain “within the bounds of current ratings.”

“This reflects our expectation that most London market insurers’ balance sheets would be able to withstand a sizeable catastrophic loss occurring within the next 12-18 months,” concludes Fitch.

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