Reinsurance prices hardened for June renewals amid lower retro capacity, with all market sectors generally pricing more conservatively. 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.
Large global reinsurers and Lloyds of London are among the entities with the highest reported estimates of pandemic related losses to date, which reinforces further price hardening in reinsurance and specialty insurance lines. The underwriting response to the pandemic includes tighter terms and conditions, such as virus and communicable disease exclusions and sub-limits in more coverage areas.
June renewal activity is weighted toward property catastrophe coverage tied to the Florida market in advance of hurricane season. Reinsurance rates were up 20%-30% for most Florida renewals, with 50%+ increases for some higher risk accounts. In response to market conditions, influential market participants, Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund, reduced the limits purchased for 2020.
Investment market volatility has not inhibited new capital from entering the market to take advantage of more favorable underwriting opportunities. An estimated $5 billion or higher of new equity funds have been raised in the last few months. Publicly traded (re)insurers have raised billions from secondary offerings, while privately held firms have raised capital from existing shareholders, debt issuance and recapitalization backed by private equity (PE) firms. Additional tie-ups with PE 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. While favorable pricing trends are poised to continue in 2021, inevitably this large influx of underwriting capacity will halt this rate momentum.
Fitch maintained its Stable Rating Outlook on the global reinsurance and North American P/C insurance sectors in March, based on a view that favorable capital adequacy levels will allow the vast majority of insurers to withstand the pandemic fallout. However, Fitch moved the fundamental sector outlook for both sectors to negative on weaker profit fundamentals and an expected decline in investment and operating performance. Capital levels have remained robust as companies have managed downside risk more effectively than in the past, unlike the fallout after Sept. 11 terrorist attacks, which led to a string of insolvencies.
Fitch reviewed 33 North American P/C and reinsurance groups that it rates on a public and private basis; 82% of ratings were affirmed with a Stable Outlook, 12% of ratings were affirmed with a Negative Outlook, 6% of ratings were maintained on Rating Watch-Evolving or Rating Watch Negative tied to pending transaction, with no ratings downgraded.