Fitch Ratings' sector outlook for global reinsurance in 2021 is stable, reflecting hardening pricing conditions, stabilising pandemic-related claims but depressed investment income due to ultra-low interest rates and deteriorating asset quality.
The sector outlook is based on an updated definition employed by Fitch, which considers underlying fundamentals expected in 2021 relative to actual fundamentals in 2020.
The sector outlook also reflects our expectation that the underlying fundamentals of major developed non-life primary insurance markets, the main source of business for reinsurers, will stabilise 2021. Fitch's rating Outlook for the reinsurance sector remains Stable.
The industry began to raise prices due to higher natural catastrophe claims and concerns over reserve adequacy and loss severity for US casualty business in January 2020. Price increases have gained momentum through the various renewal seasons since the onset of the pandemic and we expect the hardening market to continue into 2021. Demand for reinsurance is likely to increase due to heightened uncertainty linked to the pandemic and primary insurers' stronger ability to purchase reinsurance given increases in their own pricing.
The sector's capital strength has remained largely unscathed despite substantial pandemic-related underwriting losses in several segments, including contingency/event cancellation, travel, trade credit and surety, business interruption and mortality. This was achieved thanks to a series of capital increases and the recovery of financial markets from the lows recorded in spring this year.
Changes in reinsurance terms and conditions, notably the exclusion of pandemic cover in new and renewed contracts, should progressively reduce the potential for future property and casualty reinsurance claims stemming from the pandemic. Nevertheless, the uncertainty around ultimate losses from the pandemic remains high.
Reinvestment rates are well below the running yields on reinsurers' investment portfolios, and are continuing to fall. The resulting pressure on reinsurers' investment income will erode some of the likely increase in underwriting income in 2021. Moreover, a weak economic recovery could foster a deterioration in asset quality, to the detriment of the sector's profitability. Lower investment income may motivate reinsurers to maintain underwriting discipline and push up prices, but competitive forces could ultimately thwart these aims.
Fitch's sector outlooks for major developed non-life primary insurance markets in 2021 are stable or improving. This reflects our view that most pandemic-related claims will be reserved for in 2020, meaning that these markets' claim levels should normalise in 2021. We expect rate increases in several key lines to take firmer hold in 2021, but economic pressures will dampen primary insurers' premium revenue and could weaken their asset quality. The global reinsurance sector is closely linked to these markets through quota-share treaties.
