The four largest European reinsurers – Munich Re, Swiss Re, Hannover Re and SCOR – have largely maintained pricing and policy terms without a significant drop in their business volumes, despite relentless soft market conditions, according to Fitch Ratings.
Fitch explained that this underwriting resolve has been bolstered by the reinsurers’ dominate market positions.
During major renewals in recent years, each reinsurer had low-single-digit decreases for renewed business, while policy terms and conditions were largely stable, said the Fitch report, titled European Reinsurance Peer Review.
“The ability to maintain disciplined underwriting is a key competitive advantage for maintaining profitability in current market conditions, which have been hit by a protracted period of falling prices and declining investment yields,” the report said.
“Financial strength, underpinned by strong capitalization, is a key competitive differentiator and positive rating factor for each reinsurer,” it added.
The four companies reported strong property and casualty (P/C) underwriting results in 2016, which was helped by prior-year reserve releases and lower-than-expected major losses – a situation that is unlikely to continue, affirmed Fitch.
Indeed, underwriting profits could soon suffer if catastrophes return to more average levels and prior-year reserve releases dry up, the report indicated.
A case in point: the Fitch-calculated — normalized combined ratio — which excludes the impact of prior-year reserve releases and lower-than-expected major losses, was nearly 100 percent in aggregate for the market in 2016, as well as for the four European reinsurers, the report said.
This indicates that “underwriting profit little better than break-even,” Fitch added.
P/C Versus Life
The report said that P/C reinsurance is the main source of operating profit for the four reinsurers, “accounting for half to three-quarters of operating earnings,” the report continued.
However, Fitch expects a growing earnings contribution from life reinsurance, driven in part by life insurers “seeking to transfer longevity risk in response to higher regulatory capital requirements from the introduction of Solvency II.” Fitch said life reinsurance also provides earnings diversification and reduces portfolio volatility for each company.
Munich Re and Swiss Re
Of the four reinsurers, Munich Re and Swiss Re have the strongest market positions with “franchises supported by dominant, long-established P/C reinsurance market shares,” said Fitch.
“Both have the scale to deploy underwriting capacity in larger volumes than smaller peers across multiple classes….” Such scale has grown in importance as larger primary insurers increasingly place centralized multi-risk covers through global broker programs, the report said.
“The ability to lead programs gives the reinsurers greater ability to influence pricing and terms and conditions,” Fitch added, noting that these two reinsurers typically occupy the strongest and most secure positions on reinsurance panels.
Hannover Re and SCOR
Fitch said that Hannover Re and SCOR have smaller absolute size and more modest market shares, especially in the major reinsurance classes, than Munich Re and Swiss Re, but their franchises are continuing to develop.
“Each writes a smaller proportion of volatile property and catastrophe business than their larger peers, allowing them to operate with more efficient capital structures, as indicated by a higher proportion of hybrid debt,” the ratings agency said.
Fitch noted that both companies have had strong growth in financial solution and specialist products. Specifically pointing to SCOR, the report said that SCOR has successfully built its life reinsurance business through two major acquisitions in recent years.
Fitch’s fundamental outlook for the overall reinsurance sector is negative and the ratings agency said it expects the sector’s profitability to weaken as pricing and investment yields continue to decline.
The report, “European Reinsurance Peer Review,” can be downloaded via Fitch Ratings’ website.
*This story appeared previously in our sister publication Insurance Journal.