Persistent headwinds are expected to continue throughout 2017 and into 2018, with both Fitch Ratings and Moody’s saying in their reports the outlook for the global reinsurance sector will remain challenging next year.
Fitch said the outlook for global reinsurance remains negative, as profits are set to come under further pressure from falling prices and low investment yields. It said strong capitalisation across the sector means “we do not expect any significant impact on ratings over the next 12 to 18 months. But headroom is shrinking, especially following Hurricane Harvey, and a further deterioration in profit metrics beyond our current expectations could lead to negative rating action”.
Looking to 2018, Fitch expects pricing to continue to decline in 2018 as growth in alternative forms of reinsurance intensifies the competition for business. “This will mainly be driven by the collateralised reinsurance segment, where funds are likely to expand their reinsurance capacity at lower pricing margins. Market conditions for catastrophe bond issuance are also likely to remain favourable in 2018 as investors seek to diversify risks.”
In its report, Moody’s has changed its outlook for the global reinsurance sector to stable from negative as firms remain well capitalised and resilient to a range of stress scenarios, despite the challenges presented by a difficult operating environment.
Although “the operating environment for reinsurers remains negative, with an excess of supply over demand weighing on prices…we believe reinsurers are adjusting to these challenges, and that their sustained balance sheet strength and disciplined underwriting will support their current ratings”, the ratings agency said.
The world’s reinsurers are adapting to the persistent inflow of alternative capital, and using it to cut their own capital costs, said Moody’s. To counter other structural shifts, they are diversifying into new products, such as mortgage insurance and cyber, and focusing on technological innovations and cost savings. They have also continued to increase their capital levels broadly in line with new business written, while reducing tail risk associated with more remote natural catastrophe risks.
According to A.M. Best in its report, the global reinsurance sector is far from thriving and appears to be operating amid malaise, due to declining rates, broader terms and conditions, unsustainable reserve takedowns, low investment yields and continued pressure from convergence capital.
It added that the sector remains extremely challenging with limited opportunity for organic growth and declining profitability on both sides of the balance sheet, which suggests reinsurers will need to continue adapting and evolving to the changing landscape.
While conditions are challenging, the report stated that there are pockets of opportunity within cyber insurance and mortgage reinsurance, and that reinsurers have responded to market conditions by lowering their net probable maximum loss (PML) for peak zones, embracing new opportunities and geographies, producing fee income and subtly migrating into asset classes that will produce increased investment yield. However, A.M. Best believes that even a normal catastrophe year will expose the true ramifications of current market conditions, and that an above-average catastrophe year may be exceedingly damaging. M