Fitch Ratings, a provider of credit ratings, commentary and research for global financial markets, says it sees a more than positive outlook for the global reinsurance sector next year.
In a new report, Fitch said it expects significant improvements in reinsurers’ financial performances as a result of higher prices in a hardening market, in addition to a strong rebound in economic activity and lower pandemic-related losses in 2022.
According to Fitch, positive factors to be witnessed in the year 2021 and 2022 would likely outweigh the negative effects of declining investment returns, thus, increasing natural catastrophe claims due to climate change, and a temporary pick-up in inflation.
Highlighting its expectation – barring extreme natural catastrophes – to affirm most reinsurers’ ratings in 2021 and into 2022, it said reinsurers have generally been well-positioned to absorb pandemic-related losses as well as uncertainty over the ultimate losses is diminishing on the back of gradually returning normalcy.
Despite the spread of the Delta variant, the progress on vaccination has reduced the risk of excess mortality claims in life reinsurance causing the exclusion of infectious disease in renewed contingency and business-interruption treaties which has mostly eliminated the risk of new pandemic-related claims from these business lines.
Fitch added that the sector’s combined ratio – which is normalised for large losses, will improve by two to three percentage points in 2021 and another one to two percentage points in 2022 as price increase gradually feeds into underwriting margins.
However, it noted that strong capital supply and recovering profitability are slowing down price hence, the tendency that risk-adjusted prices will remain largely unchanged in 2022.
Importantly, Fitch noted that while reinsurance terms and conditions have tightened with infectious disease and silent cyber coverage excluded from many renewed treaties, renewals in that line are also starting to be affected by Environmental, Social, and Governance (ESG) considerations, with some reinsurers reducing or withdrawing facultative reinsurance cover related to fossil fuels.