Fitch Ratings has revised its fundamental outlook for the London non-life insurance and reinsurance market to negative, previously stable, due to the underlying expectation that a substantial proportion of the market faces further significant pricing pressure.
Reinsurance businesses in the London market are particularly expected to face a further decline in pricing adequacy, says Fitch, while London market primary insurance lines are expected to remain stable at best. This outlook reflects Fitch’s negative view on the global reinsurance sector, with intense competition and sluggish cedent demand leading to the continued softening seen in the market.
Fitch notes that the high amounts of alternative capital, which the rating agency says it believes are permanent, led it to conclude that prices will continue to fall and terms and conditions weaken into 2015 across an increasingly wide range of reinsurance classes.
Pressure on pricing and terms in the most affected reinsurance lines in the London market have already led to some players reducing exposures and diversifying into specialty or casualty lines of business. This search for rate and margin is expected to promote pricing pressure and softening in these lines, thus broadening the impact to the market.
Fitch has perhaps gone further than any other rating agency in its acceptance that the entry of alternative capital into reinsurance and the development of insurance-linked securities (ILS) such as catastrophe bonds and collateralized reinsurance are permanent developments in the market.
Fitch expects that alternative reinsurance capital and changes in reinsurance purchasing habits are will have long-term repercussions for the market. It believes that the current soft market is not just a normal cycle, rather that it is a fundamental change in how the reinsurance market operates.
The increasing amount of alternative capital coming into the market is a credit negative for traditional reinsurers’ ratings, as Fitch expects a significant portion of this capital market sourced capacity will be permanent.
However, Fitch views positively the way that some traditional insurance or reinsurance companies have taken advantage of the ILS trend to offer their technical expertise in catastrophe reinsurance to assist in the pricing and structuring of catastrophe bonds.
Fitch notes that its rating outlook for the sector remains stable despite these trends, as insurers and reinsurers remain well capitalised and margins broadly adequate. However, as the trend persists Fitch notes that this could change in the future.
There is a general expectation that if market conditions do not change dramatically the underwriting performance of insurers and reinsurers could gradually worse, particularly as positive prior-year reserve releases slow down. Rating agencies such as Fitch will be watching this trend over the coming quarters and we could see some change in the rating outlook if a number of attritional catastrophe losses also eat into re/insurer profitability.
Read more of the latest thinking on reinsurance capital trends in this softening rate environment: