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ILS to drive reinsurance rates: Fitch

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Future rate increases in reinsurance depend on the insurance-linked securities market’s appetite for investment, according to Fitch.

The amount of capital “trapped” by lengthy claims settlements or protracted litigation will also influence the degree to which rates rise, the ratings agency says.

Fitch expects rates to rise next year in light of catastrophe losses this year, particularly on US catastrophe-exposed lines and in the retrocessional market.

However, excess capital and the absence of an even costlier event means Fitch is less confident about widespread rate rises.

Fitch recently updated its global reinsurance rating outlook for next year to stable after catastrophe losses this year approached $US100 billion ($133.16 billion), mainly from hurricanes Harvey, Irma and Maria, Mexican earthquakes and Californian wildfires.

Any significant development in loss estimates or additional large loss events before the new year could change the outlook to negative.

Despite the losses, the industry’s “very strong capital levels” limit solvency risks.

Fitch says its “fundamental outlook” for the reinsurance sector remains negative due to intense market competition and the endurance of alternative capital depressing prices in recent years. Persistent low investment yields put further strain on reinsurer profitability.

This year’s combined operating ratio is forecast to be 109.7%, the highest since 2011, when the industry incurred losses from multiple catastrophes including the earthquake and tsunami in Japan, New Zealand quakes and Thailand floods.

Earnings from investments and operations outside non-life reinsurance will likely enable the reinsurance sector to be in profit for the full year, with a net income return on equity projected at 2.1%, down from 8.5% last year.

Next year Fitch forecasts a combined operating ratio of 95.8%, reflecting an average catastrophe loss.