Reinsurers’ two-year shake-up

Fitch Ratings’ Global Reinsurance Review & Outlook say reinsurers are at risk because of low rates and reserves and could be hit by the current hurricane season. They will be further hit by Solvency II. US insurers could suffer if protectionist rules are watered down, allowing foreign competition.

Fitch said the next two years would see a shake-out of reinsurers with firms pulling out of unprofitable lines of business.

Pressures

Fitch said: “Pressures are beginning to mount from the softening premium rate environment, reduced demand for reinsurance capacity among cedants, and continuing challenges in generating sustainable levels of investment income in the current low- interest-rate environment.

“Reinsurers are also contending with a variety of complex regulatory issues, including the introduction of Solvency II, which require adaptation to a modified competitive landscape. Fitch believes that these challenges, although significant, are manageable for most reinsurers and remain within normal cyclical expectations.

“Fitch believes that many of the traditional drivers of reinsurers’ historical profitability, such as investment income and the release of prior-year reserves, are unlikely to support earnings over the near term. As a result, the agency views underwriting discipline and proactive cycle management as critical to reinsurers’ future profitability.

Two years

“The ability of reinsurers to successfully execute on cycle management strategies will vary significantly across the sector, and Fitch considers that the next 12-24 months will prove to be a period of notable differentiation between companies.

“Winners and losers will be defined by their ability to manage their underwriting exposures by exiting or cutting back on lines of business that are no longer technically profitable.