Fitch Lowers Global Reinsurance, London Market Outlooks to Neutral

Fitch Ratings has lowered its outlooks for global reinsurance and the London market sector to neutral from improving, reflecting growing risks from rising claims inflation, financial market volatility, and weakening price momentum.

"When we last updated the outlooks in 2021, we expected higher premium rates and a strong rebound in economic activity to significantly improve financial performance," a Fitch statement said. "Although premium rates are still rising, they have begun to slow. Both markets should still report strong profit in 2022 but we no longer expect financial performance to improve significantly as we believe it will be very difficult for companies to achieve above-inflation premium increases."

Fitch said that the Russia-Ukraine war has exacerbated some negative economic trends affecting the reinsurance and London markets. Inflation, which was already increasing claims cost, has accelerated, while increased volatility in financial markets has led to higher regulatory capital requirements, as well as investment losses in some cases. Meanwhile, pressures on economic growth could reduce the demand for insurance and reinsurance, the rating agency said.

"For the global reinsurance market and the London market, the war itself represents a midsized catastrophe event, mostly affecting specialty lines such as aviation, marine, political risk, trade credit, and cyber insurance," Fitch said. "In most cases, we expect insurers and reinsurers to suffer only a hit to earnings, rather than capital depletion, and we do not expect material ratings implications. Nevertheless, there is still the potential for the frequency and severity of natural catastrophe losses to remain higher and reduce market profitability."

Fitch noted several factors it said should protect global reinsurers' and London market insurers' credit profiles from the effects of rising claims inflation, financial market volatility, and weakening price momentum that it said support its neutral outlook on the sectors.

"Capitalization is very strong, having recovered from the pandemic losses of 2020, and underwriting remains disciplined," the rating agency said. "We expect the London market's financial performance to continue to benefit from the Lloyd's of London performance-management actions. Over time, higher interest rates to counter high inflation could lead to increased investment income, partially offsetting the effect of claims inflation on insurers' and reinsurers' overall profitability."