Fitch Ratings has adjusted its outlook for the global reinsurance sector to stable, from negative, citing the hardening reinsurance market as the reason for its now more positive view on the market.
The rating agency had been negative on the future prospects of the global reinsurance market as recently as September, when a report said that Fitch’s sector outlook for 2021 remained negative.
Now, a new report from the rating agency says that the outlook for the global reinsurance sector in 2021 is now stable, citing hardening market pricing, alongside stabilising losses from the pandemic.
This latest outlook is based on an updated definition from Fitch, which the rating agency says takes into account the underlying fundamentals expected in 2021 relative to actual fundamentals in 2020.
“The sector outlook also reflects our expectation that the underlying fundamentals of major developed non-life primary insurance markets, the main source of business for reinsurers, will stabilise 2021,” the rating agency explained.
Fitch cites the return to more positive pricing momentum seen in reinsurance since January 2020, when the sector began to raise prices in the wake of higher catastrophe losses, as well as concerns over casualty reserves and other factors.
Looking ahead, “Price increases have gained momentum through the various renewal seasons since the onset of the pandemic and we expect the hardening market to continue into 2021,” Fitch said today.
Adding that, “Demand for reinsurance is likely to increase due to heightened uncertainty linked to the pandemic and primary insurers’ stronger ability to purchase reinsurance given increases in their own pricing.”
The reinsurance sectors capital strength has been largely unscathed, helped by a wave of capital increases and raises in the wake of the losses from the pandemic, Fitch notes.
Meanwhile, changes in terms and conditions are seen as likely to help insulate the reinsurance market against future property and casualty reinsurance claims stemming from the pandemic, although the pandemic does remain a significant risk and uncertainty around ultimate losses from it remains high, Fitch said.
Again positively for the reinsurance market, Fitch says that it expects major developed non-life primary insurance markets in 2021 to be stable or improving, with a read across for reinsurers as quota share performance improves, as pandemic losses lessen.
In fact, the only negatives Fitch mentions are the fact reinsurers face continued depressed investment income due to ultra-low interest rates and deteriorating asset quality, something that has now become a key driver for the hardening rates being seen, as reinsurance firms need to generate underwriting profits while their investment input is reduced.
Interestingly, there is no mention of alternative capital in this positive outlook for global reinsurance. Typically in the past, ILS and alternative reinsurance capital is cited as a threat, or something that could soften pricing.
But now, as alternative capital becomes increasingly embedded into reinsurance business models, while ILS players are also under pressure to improve returns, perhaps it is now more appropriate to highlight the growing stability of the ILS market, after a few impactful years of losses, as well as its concerted push for harder pricing as well.
The stable outlook bodes well for ILS funds and investors, as market conditions increasingly look likely to result in higher baselines on risk-adjusted pricing, supporting improved risk-adjusted returns for ILS fund strategies going forwards.