Bermuda reinsurers' record of releasing reserves for 15 consecutive years may be under threat in 2019, according to Fitch Ratings.
Speaking to journalists about Fitch's global reinsurance sector outlook for 2020, Graham Coutts, senior director of insurance ratings, said reserve releases at Bermudian reinsurers had been on a downward trend and redundancies in reserves in 2018 were lower in more recent accident years.
"This streak of 15 years will be quite significantly tested in 2019," he said.
Instead of releasing reserves, Bermudian reinsurers had to make additions to reserves equivalent to 0.4% of their net earned premium in the first half of the year, partly because of worse-than-expected claims from Typhoon Jebi and, to a lesser extent, Hurricane Michael. Coutts also said that several companies were seeing deteriorating claims cost trends in casualty business.
Insurers and reinsurers are able to release reserves from old underwriting years when it becomes clear that there will be no more claims, which boosts underwriting results and can be an indicator of sound reserving.
Coutts acknowledged that the first-half strengthening was "very minor" and that reserves might be released in the second half of the year if it is relatively benign for catastrophe losses. If there are more catastrophe losses in the second half, however, it is "quite possible" the streak will end, he said.
Like fellow agencies Moody's and S&P Global Ratings, Fitch maintained its stable outlook on the reinsurance sector overall. It forecast that its cohort of covered companies would produce a calendar-year combined ratio of 97.2% in 2019 and 98.4% in 2020, an improvement over the slightly loss-making ratio of 100.8% the group of companies produced in 2018.
It estimated that reinsurers would release $1 billion of reserves in 2019 and $1.22 billion in 2020, down from $5.42 billion in 2018.
'Low' price increases
A big topic of conversation running up to the Jan. 1, 2020, renewals has been what will happen to reinsurance prices after the increases reinsurers put through in the April, June and July renewals. Those periods are dominated by Asia-Pacific and U.S. business respectively, where the bulk of the burden of the heavy catastrophe losses in 2017 and 2018 fell.
Coutts said he expected that if 2019 was an average year for catastrophes, price improvements will be "low." He said rates went up overall by between 2% and 3% at Jan. 1, 2018, following 2017 losses and by about 1% to 2% at Jan. 1, 2019, following 2018 losses. He said that reinsurers' rates at Jan. 1, 2020, could go up "maybe one to two percent, not more than that, unless we see a significant cat hit."
The Jan. 1 renewals are dominated by European business, where there were relatively few large losses in 2017 and 2018.
However, Coutts expects reinsurers to continue to make the case for price increases. "At least for the next year or so, we would expect reinsurers to keep pushing to maintain some improvement of rate rather than going back to a softer market," he said.
