Global ratings agency Fitch has revised its outlook for the global reinsurance sector from negative to stable in response to a new market normal, underlined by more modest returns on capital but less volatility than before.
Fitch Ratings says that in recent years there has been a secular shift that has resulted in a new market normal for the reinsurance sector, driven in part by the growing presence and influence of alternative reinsurance capital.
“We believe the growth of the alternative capital sector has altered reinsurance market dynamics, making capacity shortages less likely and the underwriting cycle flatter”, says Fitch.
A new normal for the global reinsurance sector has been a topic of discussion throughout ٢٠١٨. The ability and willingness of alternative capital to reload in time for the January renewals and actually expand throughout ٢٠١٨, meant that the kind of post-event price hikes witnessed after previous large loss years, failed to materialise in after the events of ٢٠١٧.
Despite Fitch changing its fundamental sector outlook to stable from negative, the ratings agency warns that the credit fundamentals of the reinsurance industry will still reflect intense pricing competition and low investment yields, which will continue to put pressure on profitability. However, the very strong capital adequacy of the space, alongside robust risk management and generally solid business profiles, offsets this somewhat.
Fitch says that the main reason for its revised outlook is the secular shift to a «new normal», which will result in a flatter underwriting cycle, driven by the presence of Insurance-Linked Securities (ILS), which Fitch says brings both opportunities and threats.
Going forward, Fitch says that a Return On Equity (ROE) of between ٪٥ and ١٠٪ is more likely, compared with the ٪١٠ to ٪١٥ ROE witnessed previously.
If pricing pressure become severe enough to alter profitability below the cost of capital, Fitch says the outlook could return to negative. At the same time, an unexpected exodus of ILS that drives a significant improvement in rates, could see the outlook change to positive from stable, although Fitch does believe ILS is here to stay, adding that an exodus seems unlikely in the current market.
