London re/insurance market profits to be hurt by pricing: Fitch

The London insurance and reinsurance market and its companies is going to find profitability is hurt by the continued softness of re/insurance pricing, but even if claims levels return to normal levels companies are expected to remain profitable anyway, according to Fitch Ratings.

While this is good news for the market, suggesting that capital buffers are now so significant that insurers and reinsurers can endure both the lower pricing environment as well as a jump back to more normalised levels of large catastrophe and man-made losses, the outlook remains challenging.

Fitch notes that while insurers and reinsurers continue to diversify out of reinsurance and into insurance lines, or out of property and into specialty, casualty and other areas of the market, the pressure on pricing is expected to spread.

While avoiding low premium rates in some lines is positive, as it helps pricing to become more stable, the whole segment is now set to come under greater pressure due to the fact that there will soon be nowhere to hide from rate pressure, as it expands into casualty and other lines.

Fitch said that it “expects this to lead to further price falls in these lines as well,” which added to the pressure on the investment income side, where returns remain hard to generate and some re/insurers are struggling, the expectation is lower profits.

But the strong capitalisation of re/insurers and the expected continuation of strong reserve releases as well are set to ensure that London market insurance and reinsurance companies remain largely in profit, even after losses normalise.

The question then is how much above normal does the market’s loss experience have to be before a wider array of companies show declining profits. It seems safe to assume that the profitability buffer here is shrinking, as prices continue to decline, meaning that the next major loss year could see steeper declines in profitability than seen in recent heavier loss years.