Fitch Says Global Re Market Still Shaky
NU Online News Service, Sept. 10, 1:49 p.m. EST? A year after the Sept. 11 terrorist attacks, the global reinsurance industry is still hurting, according to a report by Fitch Ratings in London.
Despite substantial rate increases, Fitch said, the industry has not recovered sufficiently to earn reasonable returns, leading to a continuing negative outlook on U.S. and global reinsurance markets, and the prospect of further rate increases, according to Fitch.
The report discusses the major events of 2002 and the key issues that will shape the industry going forward. It also includes details of rating activity and financial results for recent years and interim financial data for mid-year 2002.
The authors found that the reinsurance market is still recovering from its recent severe under-performance and losses from Sept. 11, 2001.
Underwriting capacity, according to the report, has generally been replenished through capital raising at existing companies and the creation of several new reinsurance companies.
It found that market pricing and competitive conditions have improved considerably, and profitability has also improved during 2002.
However, Fitch said it also believes significant rate increases are needed just to bring premiums close to the correct technical level (that is, break-even underwriting), and that reserve adequacy remains in doubt.
While proficient underwriters not plagued by past problems might earn an adequate return on capital in the current market, Fitch said it does not believe the reinsurance business has improved to the point where the broader market can earn reasonable returns, reflecting uncertain market trends.
Based on these considerations, Fitch said it is maintaining a negative outlook on the U.S. and global reinsurance markets.
The company said it believes that there is generally a renewed commitment to disciplined underwriting by reinsurers, which Fitch said is a natural and appropriate reaction given the industry's poor 1999 and 2000 underwriting results, disastrous 2001 underwriting results and the deteriorating investment climate.
Fitch said the commitment to good underwriting will be strongly tested, and there are many challenges that may hinder progress towards underwriting profits.
The firm said it sees the momentum for higher rates continuing through 2003.
However, it warned that when profitability does improve and conditions stabilize, marginal capacity and price competition are likely to return to the market, creating conditions that will again force reinsurers to choose between maintaining rate adequacy or relaxing underwriting standards to maintain market share.
From an industry-wide perspective, Fitch said it believes this process is inevitable and merely represents the cyclical nature of the reinsurance industry.
The company said its outlook for the global reinsurance sector is likely to remain negative over the near term until a sustainable improvement in operating profitability is more evident and reserve development trends stabilize.
As a result, Fitch said it expects that rating downgrades will continue to outnumber upgrades in the near term.
However, Fitch also said it believes the outlook for the reinsurance industry will move to stable more quickly than that of the primary market. This view primarily reflects the reinsurance industry's greater flexibility to adjust its insured portfolio in response to market changes compared to primary insurers, which operate in a more regulated environment regarding pricing and policy form.
A full copy of the report, entitled: "Review and Outlook: Mid-Year 2002 Global Reinsurance," can be found at www.fitchratings.com under the "Insurance" sector in the "Criteria & Special Reports" section.
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