The global reinsurance market now appears to have returned to a pre-weak market state of providing capital protection rather than profit protection, Fitch Ratings said.
The rating agency notes that for primary insurers this means that a larger portion of each claim will likely be retained, while the protection they enjoyed for the more frequent and volatile secondary claims has now been significantly reduced .
For reinsurance companies, Fitch views this as a structural improvement for their businesses and does not expect a rapid reversal of this new status quo.
The driver? According to Fitch, natural catastrophe reinsurance underwriting became a largely loss-making business during these years of market downturn.
This is mainly because “prices have failed to keep pace with increasingly frequent, severe and volatile weather-related losses due to climate change.”
“This has reduced the willingness of reinsurers to provide cover against natural catastrophes, especially as other lines of business now benefit from price increases in excess of claims inflation. Tighter conditions for natural catastrophe coverage 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,” explained Fitch.
Global reinsurers have reduced the capacity they make available to cover natural catastrophe risks, partly under pressure from their shareholders and private equity investors.
Of course, the insurance-linked securities (ILS) market has followed suit, and perhaps even led the way, as seen in the catastrophe bond market, where protection prices have started to increase from mid-2021.
Another incentive for reinsurers has been that other segments of the reinsurance market have started to generate better profits, meaning they have had more flexibility to work on reducing or improving their businesses. underwriting real estate catastrophe risks.
“Some companies were already withdrawing from the general insurance market in 2022, but even the strongest reinsurers have now pulled back, largely by tightening their terms and conditions to limit their overall coverages and reducing levels of catastrophe protection natural,” Fitch explained.
Adding that “this leaves primary insurers much less protected against secondary risks. However, reinsurers still provide sufficient coverage against the most serious events.
“The reinsurance market appears to have returned to its pre-market weakness state of providing capital protection to cedants, rather than profit protection.”
Fitch Ratings believes that the trajectory we have seen in reinsurance rates and pricing may continue, although perhaps not at the rates seen over the last 12 months or so.
The ratings agency believes that rate adequacy is now largely in place, with tightening having been underway for several years now.
“Fitch expects reinsurers to maintain strong underwriting discipline despite rising interest rates and that the tightening of the reinsurance market persists through 2024. However, price increases are expected to be more moderate than expected. ‘in 2023, as rate adequacy has generally been achieved through several rounds of tightening since 2018.’, the company explained.
All of this bodes well for greater rate and price stability for protection backed by catastrophe bonds and insurance-linked securities (ILS).
Currently, most seem to believe that the market will not see a return to steady rate declines, even if capital flows resume later this year.
Of course, we are still in hurricane season and, as we have seen in recent years, there are many other issues that could threaten the bottom lines of reinsurers and the ILS market, which could further strengthen the market’s resolve not to not return to hurricane season. prices as low as we saw in the mid-2010s.