Reinsurance returns to pre-soft market state as capital protection provider: Fitch

The global reinsurance market now appears to have returned to a pre-soft market state of providing capital protection, rather than earnings protection, Fitch Ratings has said.

The rating agency notes that for primary insurers this means more of every loss event is likely being retained, while the protection they had benefited from for the more frequent and volatile secondary peril losses has now greatly reduced.

For reinsurance firms Fitch sees this as a structural improvement for their businesses and does not expect a swift reversal of this new status-quo.

The driver? The fact that underwriting natural catastrophe reinsurance had become a largely loss-making endeavour through those soft market years, Fitch believes.

A major reason for that being the fact that, “Prices have failed to keep pace with increasingly frequent, severe and volatile weather-related losses due to climate change.”

“This has reduced reinsurers’ appetite to provide natural catastrophe cover, particularly as other business lines are now benefitting from price rises that are higher than claims inflation. Tighter terms and conditions for natural catastrophe cover are a structural improvement that should benefit reinsurers’ risk profiles in the medium term as they are unlikely to be quickly reversed even when market conditions change,” Fitch explained.

Global reinsurers have cut back on the capacity they make available to cover natural catastrophe risks, partly driven by pressure from their shareholders and private equity investors.

Of course, the insurance-linked securities (ILS) market had followed suit, or perhaps even led the way as was seen in the catastrophe bond market where prices for protection began to rise from the middle of 2021.

Another drive for reinsurers was that other parts of the reinsurance market began to deliver better profits, meaning they had more flexibility to work on reducing, or improving, their activities in property catastrophe risk underwriting.

“Some companies were already retreating from the property-casualty market in 2022 but even the strongest reinsurers have now pulled back, largely through tightening their terms and conditions to limit their aggregate covers and low layers of natural catastrophe protection,” Fitch explained.

Adding that, “This leaves primary insurers much less protected against secondary peril events. However, reinsurers still offer ample cover against the most severe events.

“The reinsurance market appears to have returned to its pre-soft market state of providing capital protection for cedents, rather than earnings protection.”

Fitch Ratings believes that the trajectory we’ve been seeing in reinsurance rates and pricing can continue, albeit perhaps not at the rates seen over the last 12 months or so.

The rating agency believes that rate adequacy is largely in place now, since hardening has been ongoing for a number of years now.

“Fitch expects reinsurers to maintaining strong underwriting discipline despite higher interest rates and for reinsurance market hardening to persist into 2024. However, price increases are likely to be more moderate than in 2023 as rate adequacy has generally been reached through several rounds of hardening since 2018,” the company explained.

All of which bodes well for more stability in rates and pricing for catastrophe bond and insurance-linked securities (ILS) backed protection as well.

Right now, it seems most believe that the market will not witness a return to a steady decline in rates, even if capital flows pick up later this year.

Of course, we’re still in the hurricane season and as we’ve seen in recent years, there are plenty of other issues that could threaten reinsurer and ILS market results, which could further steel the determination of the market to not revert back to prices as low as we saw in the mid-2010’s.