Fitch Ratings remains negative in terms of its sector outlook for the London non-life insurance and reinsurance market for 2015, acknowledging the growing pressure on this market, while it maintains a stable outlook on individual ratings for the moment.
Fitch turned negative on the London non-life re/insurance market in December, reflecting the expectation that a significant amount of London market business faces continued pricing pressures. Reinsurance in particular is cited by Fitch as likely to see continued declines in pricing adequacy, while primary insurance lines remain stable at best.
Adequate margins, high levels of capital, strong enterprise risk management and prudent asset strategies help to underpin the rating outlook for individual London market insurers and reinsurers, Fitch explains.
“Intense market competition in reinsurance and sluggish cedent demand has resulted in a softening market,” Fitch explains.
The rating agency continues to consider the entry of alternative capital as a permanent fixture in the re/insurance market, it says and this leads to an expectation that; “Prices will fall and terms and conditions weaken in 2015 across a wide range of reinsurance classes.”
Approximately 37% of the London market is made up of reinsurance business, while this is a high percentage Fitch notes that only a portion of this is exposed to the reinsurance lines of business most affected by pricing declines.
Low-levels of catastrophe losses both increase the pressure but also help to ensure re/insurers remain well-capitalised. However, with discipline perhaps not what it was in the market, as re/insurers broaden terms and effectively take on more risk, this may not continue to be the case, according to Fitch.
“As pricing and terms and conditions in catastrophe-exposed lines are expected to deteriorate further, the loss absorbency of catastrophe premiums is diminishing, resulting in higher potential exposures,” Fitch says.
Capital levels are expected to remain high in the London market, Fitch says, noting that it would take a series of large losses to really deplete re/insurer capital levels. As a result it is major losses that are the biggest risk to the market still, despite the ongoing pressure and negative outlook.
However, the rating agency concludes; “Downgrades could also occur should margins weaken beyond Fitch’s expectations, for example combined ratios would come close to 100%. This could be driven by higher-than-expected price softening, unexpected losses or reserve deficiencies. Upgrades are viewed as unlikely.”