Rising Reinsurance Prices, Tighter Conditions Attracting New Capital

Reinsurance price hikes are drawing additional capital to the market amid the fallout from the COVID-19 pandemic, according to Fitch Ratings.

In the current environment, marked by years of accumulating catastrophic losses, investment market losses, and significant losses expected as a result of the pandemic, there is potential for double-digit reinsurance price increases to extend into 2021, Fitch said.

The rating agency noted, however, that the upcoming hurricane season remains uncertain as does the shape and pace of the economic recovery.

"Reinsurance prices hardened for June renewals amid lower retro capacity, with all market sectors generally pricing more conservatively," Fitch said. "The strength of increased pricing brings reinsurance rates more in line with primary insurance markets, as reinsurers had seen pressure from large property losses, increased liability losses, higher retrocessional pricing, and persistently low interest rates."

Fitch noted that large global reinsurers and Lloyd's of London are among the entities with the largest reported estimates of pandemic-related losses to date, reinforcing additional hardening in reinsurance and specialty lines. The underwriting response to the pandemic includes tighter terms and conditions and sublimits in more coverage areas, Fitch said.

Investment market volatility hasn't prevented new capital from entering the reinsurance market to take advantage of more favorable underwriting opportunities, Fitch said, with an estimated $5 billion or more of new equity funds raised during the last few months.

"Additional tie-ups with (private equity) companies and side cars are expected to be utilized to raise and deploy capital and scale existing reinsurers more so than start-ups or new market entrants, which Fitch views as less probable given the inherent challenges," the rating agency said. "While favorable pricing trends are poised to continue in 2021, inevitably this large influx of underwriting capacity will halt this rate momentum."