Fitch has set a stable outlook on the global reinsurance industry for the first time in five years but is also warning that price competition could start to intensify again given recent catastrophe-induced increases.
The ratings agency said Sept. 4 that it revised its global reinsurance sector outlook to stable from negative. Speaking to journalists at a briefing on the outlook, Fitch director Graham Coutts said the agency had made the change because of a shift to a "new normal", characterized by lower but less volatile returns to shareholders.
Historically, reinsurers might have expected a return on equity of between 10% and 15%, but that figure is now more on the order of between 5% and 10%. Part of the reason for the change is the influx of so-called alternative capital from capital markets investors backing collateralized reinsurance and insurance-linked securities, or ILS.
Although alternative capital has increased pricing pressure and lowered returns for the traditional reinsurance market, it has also provided traditional reinsurers with a mechanism for keeping their losses in check, Coutts explained. He said reinsurers have been able to maintain healthy capital positions after the heavy burden of natural catastrophes in 2017 in part because they could pass some risk to capital markets.
That said, Coutts believes that if alternative capital suddenly departed the industry, the resulting improvement in prices "could lead to a positive outlook for the sector."
Reinsurance prices increased at the key renewal dates in 2018, but Coutts noted that the increases tailed off as the year went on, particularly for reinsurance policies where there had been no claims. This might have been because alternative capital lost in the 2017 natural catastrophes had not been fully replenished in January, but was later in the year, he suggested.
"We think pricing competition could intensify again, particularly if we see a continuation of the benign start to the year we have had," Coutts said. The outlook on global reinsurance could be cut back to negative "if we saw pricing or profitability start to fall below the cost of capital," he added.