Reinsurance market pricing is expected to keep rising through 2022 at the renewals, but the rate of increase is expected to slow somewhat, by Fitch Ratings.
Higher reinsurance pricing is set to buoy profits for reinsurers and in a new report analysing the Bermuda reinsurance marketplace, rating agency Fitch says that combined ratio improvements, alongside the better rates, could more than offset catastrophe losses for the reinsurers on the island.
Whenever a rating agency comments on the Bermuda reinsurer cohort it reads-across to the insurance-linked securities (ILS) world, given the Bermuda reinsurance market’s significant use of third-party capital and many of the reinsurers management of ILS funds, sidecars and other structures.
Positively, for both the traditional reinsurance and ILS markets, Fitch forecasts that pricing will continue to rise through the midyear 2022 renewals, but this is expected to be at a declining rate for.
That aligns with the thoughts of our sources and other analysts, who as we explained believe reinsurance rates have more ground to catch up, compared to retrocession and primary insurance prices.
Fitch expects that the mid-year 2022 reinsurance renewals will see a continued material differentiation of program pricing based on loss experience, continuing the trend to differentiate that has become far more prevalent in recent years.
This is healthy though, as blanket rate rises are not always appropriate, with a more nuanced approach to rate based on performance and loss impacts seeming a much more sensible approach, as long as baseline risk adequacy is approached.
Fitch sees the 2022 fundamental sector outlook for global reinsurance as “improving” now, thanks to another round of rate increases.
However, the rating agency definitely implies there is room for more rate to be gained, as it says that January price increases are only “sustaining the overall rate rises that have continued since early 2018.”
Elevated levels of catastrophe loss activity, alongside concerns over climate risk, continuing low interest yields, deteriorating loss-cost trends, plus rising economic and social inflation, alongside declining casualty reserve adequacy and growing cyber claims, are all factors that are supportive of further reinsurance market hardening, Fitch believes.
For full-year 2021, Fitch now forecasts that the full-year combined ratio for the eight Bermuda re/insurers that it tracks will be slightly below the 99.1% posted through 9-month 2021 and down from the 103.4% reported in 2020.
That will please investors and shareholders and also implies lower overall cessions of losses to third-party capital, in many cases.
However, it is important to note that the impact of another heavy catastrophe year in 2021 does mean the majority of ILS vehicles sponsored by reinsurers will have, at the very least, seen some attrition.
So, it is entirely possible that some Bermudian reinsurers have leveraged their third-party capital partnerships in such a way that it helps them moderate their combined ratios, having faced a challenging few years of late.
Fitch noted that Bermuda based re/insurers have continued to utilise insurance-linked securities (ILS) and third-party capital to help them diversify their sources of risk transfer through 2021.
“The use of catastrophe bonds by these companies represents a diversifying source of capital in an environment with sharply rising rates in the retrocession market,” Fitch said.
Overall, Fitch is estimating risk-adjusted price improvements balance out at around 1% across the whole portfolio, assuming a normalised level of natural catastrophe claims.
On the back of this, Fitch said the reinsurance sector will improve its return on capital in 2022, to above the high-single-digit return forecast for 2021.
As a result, it could even reach a level that is broadly in line with the industry’s cost of capital, the rating agency explained.
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