Reinsurance price rises & demand have growing momentum: Fitch

Rising reinsurance prices have growing momentum behind them, as the sector comes under increasing pressure from losses due to the Covid-19 pandemic, while at the same time capacity in the market has been constrained, according to Fitch Ratings.

Discussing the strong and dominant business profiles of the big four European reinsurance players (Munich Re, Swiss Re, Hannover Re and SCOR), Fitch explained that market prospects look bright, as long as opportunities can be capitalised upon.

“Due to the coronavirus pandemic the reinsurance sector entered into a hard market phase in 2Q20, with accelerating price increases and improving terms and conditions,” the rating agency explained.

But it’s more than just the Covid-19 effect on reinsurance rates. There’s also the impact of recent catastrophe loss years and the effect that has had on alternative, insurance-linked securities (ILS) market capacity to consider.

With capacity somewhat dented from that angle, especially in the retrocession space, pressure on reinsurance pricing is coming from many angles in 2020.

Fitch sees rising demand for reinsurance protection, which it expects will provide tailwinds to the big four reinsurers, but that will also read across to the rest of the industry and also the ILS marketplace.

While demand is rising, Fitch also sees continued capacity constraints in reinsurance, now more broadly than just due to trapped ILS collateral, as the Covid-19 pandemic has pressured other traditional companies as well.

“Financial market volatility, rising claims across various lines of business and heightened uncertainty has led to a rise in demand for reinsurance cover while capping available capacity at the same time,” the rating agency explained.

We’d already seen the pricing pressure applied by constrained ILS capital and a dent to the retrocession market, but looking ahead to the January 2021 reinsurance renewals, it is possible that rising demand alongside much more broadly constrained capacity could have an even bigger effect.

For the big four reinsurers this is a positive outlook, as they have the capacity to deploy significant lines to support clients.

It also bodes well for those able to raise capital in time for January 2021, both on the traditional side and in the ILS fund market.

Whether any of the proposed start-ups can be ready in time remains to be seen, but we are almost certain to see some kind of inflows to the ILS sector.

It’s not certain, at this time, whether inflows will be sufficient to replace trapped ILS collateral due to the pandemic at this time, but the opportunity is clearly there for investors, and the way market dynamics are playing out the end of this year may turn out to be the most attractive ILS fund entry point in some years.

The momentum behind reinsurance demand may increase as the true impacts of the coronavirus on traditional reinsurers books and the tail of the pandemic loss event become clearer.

Fitch notes that, “The uncertainty surrounding the effects of the coronavirus pandemic makes the financial performance of the reinsurance sector hard to predict.”

On the other side, price increases are likely to also persist, perhaps accelerate, making the opportunity in reinsurance as good as it has been in well over a decade at this time.