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Reinsurer outlook improves as COVID risk dims

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Reinsurers globally are expected to perform better this year and also over the next 12 months, supported by a rebound in economic activity and lower virus-related losses, Fitch says in a new report.

The rating agency made the projections as it revised its fundamental outlook for the sector to “improving” from “stable”.

“This reflects the expected significant improvement in the sector’s financial performance in 2021 and 2022 on the back of higher prices in a hardening market environment, a strong rebound in economic activity, and lower pandemic-related losses,” Fitch said.

“These positive drivers will only partially be offset by declining investment returns, a higher frequency and severity of natural catastrophe claims, and a temporary pick-up in inflation rates.”

Pandemic loss uncertainty is diminishing, due partly to infectious disease exclusions in renewed contingency and business-interruption treaties, eliminating the risk of new claims, Fitch says.

It says the industry is in line for better underwriting margins and estimates reinsurers’ combined ratios should be able to improve 2-3 points this year and another 1-2 points next year.

The global reinsurance sector had significant risk-adjusted price increases in property and casualty reinsurance over the past 24 months for both excess-of-loss and quota share treaties.

Reinsurers have also benefitted from price hikes and tighter policy terms and conditions pushed through by cedants, especially in commercial lines.

The Fitch report says terms and conditions have also tightened for the reinsurance industry, including the notable exclusion of infectious disease and silent cyber coverage from a large number of renewed treaties.

“Environmental, social and governance-related considerations have not yet affected renewals, with the exception of facultative reinsurance covers related to coal or fossil fuels, which have had reductions or outright withdrawals,” Fitch said.

“This trend is likely to expand over time.”

Fitch says cyber risk coverage will remain a niche product for reinsurers even as take-up increases in the coming years.

“As this type of risk is constantly evolving, historical data cannot be used to price it correctly,” Fitch said. “Cyber risk is systemic in nature as successful attacks can affect companies or administrative bodies all around the world at the same time.

“Therefore, reinsurers are likely to accept only a limited amount of net exposure in their books.”