The outlook of the global reinsurance sector is “stable,” which is mainly a reflection of hardening pricing conditions and tighter terms and conditions, according to AM Best and Fitch Ratings in two reports.

AM Best said the market has seen improved market discipline, driven by historically low interest rates and limited alternative investment opportunities. Fitch cited stabilizing pandemic-related claims as a factor in its stable sector outlook.

Fitch said tighter terms and conditions, notably the exclusion of pandemic cover in new and renewed contracts, “should progressively reduce the potential for future property and casualty reinsurance claims stemming from pandemic.”

“Nevertheless,” Fitch added, “the uncertainty around ultimate losses from the pandemic remains high.”

AM Best said pricing in the reinsurance market has been hardening across the board, but the most affected lines are U.S. and Asia property, which have been affected by higher loss activity during the past several years.

Growing Need for Reinsurance

Both rating agencies said there has been a growing need for reinsurance protection. AM Best said primary writers are looking for capital management solutions and more stability in their results, given the uncertainties of the COVID-19 crisis. (AM Best’s comments were contained in its Dec. 7 report titled “Market Segment Outlook: Global Reinsurance.”)

Fitch predicted that demand for reinsurance is likely to increase due to heightened uncertainty linked to the pandemic as well as primary insurers’ stronger ability to purchase reinsurance given the increases in their own pricing. (Fitch made its reinsurance sector comment in a Dec. 3 report titled “Global Reinsurance Sector Outlook Stable on Hardening Market.”)

Effects of Capital Raising in 2020

AM Best pointed to the sector’s capital expansion in 2020 by existing companies that have raised capital and start-ups that have launched – all seeking to benefit from the hardening market.

“Whether this implies a new cycle of rapid capital expansion that dampens any price improvements within a short period remains an open question,” said AM Best.

“Capital erosion is not the main driver this time (unlike previous hardening phases), in our view,” said the Best report. “On the contrary, rates are increasing despite – not because of the lack of – excess capital.”

The report said the main reason for hardening rates were due to the segment’s continued underperformance the reinsurance companies’ inability to meet the cost of capital in an environment of low interest rates.

“At this time, we do not believe that the new entrants are likely to have a material impact on excess supply or market discipline,” AM Best continued.

Other findings in the two reports discuss the sector’s cost of capital and capital strength.

Fitch said the sector’s capital strength has remained largely unscathed, thanks to a series of capital increases and the recovery of financial markets from lows seen in the spring.

Meeting the cost of capital is critical if reinsurers want to survive, said AM Best. “[T]he current market hardening will need to continue for at least a couple of years to have a meaningful impact on the segment,” said the ratings agency. “Pricing momentum will have to be sufficient to offset losses from previous years, including the impact of COVID-19 and the ongoing growth in social inflation.”

Not all companies will be able to take advantage of improved market conditions, said AM Best, noting that a flight to quality is likely to play a role in reinsurance buying. “Financial strength, reputation, market position, product diversification, healthy balance sheets, and consistent and transparent underwriting performance may prove to be the differentiators between winners and losers.”

COVID-19 Claims Uncertainty

COVID-19 adds uncertainty to the reinsurance segment, which over the past three years has seen increased loss activity from natural catastrophes and social inflation, said AM Best.

“The ability to relay on favorable prior year reserve development has been diminishing steadily over time,” said AM Best. “Although the robustness of modelling for even the best understood risks – such as U.S. hurricanes – is being put into question, the incidence of risks that are more difficult to model, such as wildfires, cyber, pandemics—continues to grow.”

AM Best said estimates for ultimate COVID-19 related losses for both insurers and reinsurers globally range widely, from US$30 billion to US$100 billion, with the latest estimate of reported losses at US$25 billion.

*This story ran previously in our sister publication Insurance Journal.