Reinsurance & London Market sector outlooks downgraded by Fitch

Because the Russia and Ukraine war is exacerbating negative macro trends, Fitch Ratings has revised its global reinsurance and London market sector outlooks downwards to Neutral from Improving.

While the invasion of Ukraine by Russia is core to this move, Fitch also believes some reinsurance and insurance market fundamentals are now looking less positive than they were.

The main drivers of the downgrade to the sector outlooks for the global reinsurance and London Market segments are, increasing risks from rising claims inflation, financial market volatility and also weakening price momentum.

Fitch explained, “When we last updated the outlooks in 2021, we expected higher premium rates and a strong rebound in economic activity to significantly improve financial performance. Although premium rates are still rising, they have begun to slow.

“Both markets should still report strong profit in 2022 but we no longer expect financial performance to improve significantly as we believe it will be very difficult for companies to achieve above-inflation premium increases.”

In addition, Fitch noted that, “The Russia–Ukraine war has exacerbated some of the negative macro-economic trends affecting reinsurers and the London market.”

While on the macro side, “Rising inflation, which was already pushing up claims costs, has accelerated. Increased financial market volatility has led to higher regulatory capital requirements and – in some cases – to investment losses due to wider credit spreads and lower equity valuations. Pressure on economic growth could dampen demand for insurance and reinsurance cover.”

Fitch highlights concerns related to claims inflation for shorter tailed business, including property, while also warning that in longer-tailed lines insurance and reinsurance writers may not be able to raise premiums fast enough to keep up with inflationary factors, driving reserve deficiencies.

On the war in Ukraine and Russia’s invasion of the country, Fitch says it “represents a mid-sized catastrophe event” but mostly affecting specialty lines.

As we explained, there is a chance of some insurance-linked securities (ILS) market exposure here, largely in niche collateralized specialty reinsurance or retrocession, or sidecars that provide coverage across a broader portfolio than just catastrophe risks.

Alongside this, Fitch cautions of “the potential for the frequency and severity of natural catastrophe losses to remain higher and reduce market profitability.”

The fact capitalisation remains very strong is seen as beneficial and something that could help ward off rating actions on insurers and reinsurers, protecting their credit profiles against the rising claims inflation, financial market volatility and weakening price momentum, Fitch believes.

While Lloyd’s is expected to continue to improve its underlying performance due to the actions taken by management.

Overall, Fitch says that if inflationary pressures persist, “higher interest rates to counter high inflation could lead to increased investment income, partially offsetting the effect of claims inflation on insurers’ and reinsurers’ overall profitability.”