Reinsurance rebounds well but long-term doubts linger

The record catastrophe claims of circa $144bn sustained by the global re/insurance industry last year were not reflected as many had expected at the early year renewals, with record capacity levels fuelled by alternative capital keeping completion intense. That the industry managed to rebound from the losses is something that should be celebrated, with the claims sustained not having a major impact on reinsurers’ ratings. “One of the most interesting aspects of this is how well the market rebounded,” Brian Schneider, Fitch’s global head of reinsurance, said, noting that the industry’s strong capitalisation should allow the agency to affirm the majority of its ratings over the next 12 to 18 months. “Alternative capital in the sector reached record levels in time for the January renewals,” says Schneider, “and enough healthy renewals helped dampen worries about price problems.” Despite the record catastrophic losses of 2017, rate increases were modest at January 1 and a similar situation was seen during the April renewals, suggesting the tougher stance that underwriters adopted at January 1 may not be sustainable. As Schneider noted though, it is the June renewals where interest is particularly high as it is mainly these contracts that suffered losses from last year’s events. “It’s the June renewals that we’re most interested in, especially as this will include the Florida market,” Schneider said, noting that while the Sunshine State emerged relatively unscathed from last year’s events, a wider sense of unease about the potential for losses remains. “It was a near miss,” Schneider said about Miami and other nearby and heavily-built up areas of Florida which were spared the full force of 2017’s hurricanes. “It could have been worse; much, much worse for re-insurers. A $30bn hit could have actually been a $100bn hit. If the storms had hit Miami - the only major global city in the region - it could’ve led to price increases come renewal time,” he added. Having been hit more than $100bn of catastrophe claims, the re/insurance industry can hardly say it had a lucky escape, but the situation could have ultimately been far worse. Part of that is because the industry has got better at managing its catastrophe risk, but as Schneider warned, companies have not been getting paid for the risk they have been taking on. “Reduced cat exposure and diversification have therefore meant fewer losses – especially considering those hurricane loses,” he adds. “A lot of companies are rebuilding their earnings and balance sheets without having to raise capital, which is good from a credit perspective. There’s also some very strong capital levels [and] we like that,” he added. At the same time, the relatively muted pricing upticks in the wake of the catastrophe events could just be the way the market is evolving, suggested Schneider. “Capital coming in is not helping prices increases,” he said, adding that competition for business means the market’s push to raise pricing is short-lived. “There’s too much capital to sustain price rises and too many companies chasing too few available options,” he noted. A return to profitability Despite the difficulties in achieving meaningful rate rises at this year’s renewals, Fitch does see reinsurers’ profitability improving this year. Forecasts show the underlying accident-year reinsurance combined ratio excluding catastrophes to improve slightly to 92.1% in 2018 versus 92.6% in 2017, reflecting marginal price improvements. Returns on equity should rebound in 2018, Schneider said, with modest growth in equity capital levels and an improvement... CLICK HEADLINE TO READ MORE

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