LONDON — While the capital position and profitability of reinsurers looks set to remain strong, competitive pressures caused in part by the continued inflow of alternative capital and a drop in buyer demand for reinsurance have led Fitch Ratings Ltd. to assign a negative outlook on the sector, the rating agency said during a briefing in London Wednesday.
Fitch said it expects to affirm the ratings of the majority of reinsurers it tracks over the next 12 to 18 months, but noted that the seeming permanence of a large proportion of the alternative capital and expected broadening of rate reductions and widening of terms and conditions into lines of business other than U.S. property catastrophe may affect the profitability of traditional reinsurance companies in the longer term.
Martyn Street, a senior director at Fitch in London, said that while the rate reductions for reinsurance being seen are still, on the whole, not large enough to make business unprofitable, there is a potential for the influence of alternative capital to mean that there is a structural change in the industry.
Rather than being an effect of the cyclical nature of reinsurance, if alternative capital remains in the sector in “a meaningful way” — even after any large loss or rebound in yields for other investment classes —this could result in “a permanent erosion of profit margins” for some reinsurers, Mr. Street said.
Many reinsurers are set to divert some capital to risks in Europe and Asia and away from the U.S. property catastrophe market as that area becomes saturated and rates reach a “floor,” Mr. Street noted.
For 2015, some of the largest rate decreases for property catastrophe business may be seen in Europe and Asia, noted Mr. Street.
Many underwriters also likely will seek to write more casualty business, he said.
Fitch on Wednesday published two reports on the reinsurance sector, “2015 Outlook: Global Reinsurance,” and “Global Reinsurance’s Shifting Landscape.”