July 27, 2004 by Canadian Underwriter
Global reinsurers are cleaning up their act, prompting Fitch Ratings to change its outlook on the sector to stable from negative, where it has been since 2001.
Fitch says there should be fewer rating changes in the near term, and downgrades should not outnumber upgrades significantly as has been the case over the last three years. The reason is the improved reserve position of reinsurers, along with Fitch’s believe that adverse development will slow down in the next 18-24 months, affecting a limited number of reinsurers and falling within manageable levels with respect to capital levels.
The improved reserve position of reinsurers takes its lead from improvement in the primary sector’s reserves, specifically in U.S. commercial lines, where Fitch recently changed its outlook to stable from negative. “Historically, the U.S. has been a major source of much of the global reinsurance sector’s adverse development and Fitch’s projected industry-wide deficiency has declined moderately to a range of US$44-$62 billion compared to a range of US$46-$77 billion a year ago,” the rater notes.
Reinsurers have also taken a more conservative underwriting stance, avoiding business which would lead to significant adverse development in recent years.
Despite rate moderation, Fitch says the prospects for profitability remain strong, particularly for those who remain selective about the risks they assume.
Fitch expects the sector to pull in a combined ratio of 95-98% notwithstanding a large catastrophe, with this year’s results benefiting from the flow-through of rate increases implemented between 2001 and 2003. However, the combined ratio will likely hit its bottom point in the next 12 months.