What enables Fitch to develop the global insurance industry?

Last week Fitch Ratings revised its outlook for the global insurance sector from 'enhanced' to 'neutral'. So, what's behind the upgrade?

At the insurance forum on 'Global Economic Outlook 2025' at RVS in Monte Carlo, director Manuel Arrivé (pictured left) said the rating agency expects sector trends and key credit drivers to remain stable over the next 12 months. The sector, he said, has very strong capital and financial performance, by historical standards. And Fitch expects both the balance sheet and profitability to remain strong through 2025. However, “further improvement in fundamentals from this point is unlikely.

“We believe the cycle may have peaked but market conditions should remain positive and support strong returns,” he said. “Yes, there are serious risks that remain high, but we think that insurers are in a stronger position than last year to deal with any major shock.”

What's behind Fitch's decision?

A mix of positive credit, credit neutral and negative credit factors have traded broadly to underline the sector's strong profitability, according to Arrivé. On the positive side, Fitch expects stable markets with adequate levels and strong terms and conditions holding up despite rising competitive pressures. “The sector is enjoying the most improved cash flow over the past 12-18 months, and reserves are also strong overall, with positive developments across many lines of business.”

Both capitalization buffers and reserves provide protection against unexpected profit fluctuations, he said. Meanwhile, investment income should continue to benefit from high reinvestment yields and income growth should remain stable, supported by increased demand in P&C, health and life, and important, special lines.

In neutral factors affecting the sector, Arrivé highlighted the balanced dynamics between supply and demand. The capital has been growing faster than demand, he said, closing the gap in real estate, for example, and this has the effect of stabilizing prices. “Then you have macro factors first, economic growth, which is moderate but stable. That still supports the need for primary insurance companies.”

In the case of interest rates, he noted that interest rates are currently neutral, and Fitch believes that companies will have reaped most of the benefits of rate hikes by the end of 2024 – with rates likely to decline from there. However, that decline should be gradual and moderate, and companies should be well prepared to mitigate the impact, especially on solvency. “Inflation continues to moderate, but the biggest unknown is still political and geopolitical risk.”

On the downside, Arrivé noted that the market is softening moderately, with risk-adjusted prices falling from multi-year highs due to heightened competition, but tempered by underwriting discipline. On the other hand, he said, the cost of applications continues to rise, and this is driven first by nat-cat – due to climate change – and damage to the US – due to social inflation.

Insurance renewal – rates compared to property negotiations

Turning his attention to the renewal, he highlighted that, in January, there was only a moderate price increase in many lines, which is a significant moderation from the large double-digit increase seen in 2023. July. A key takeaway from these recovery periods was that property values ​​were too low to offset the loss-making businesses and slightly higher for loss-making businesses. For victim lines, prices were consistent with previous updates, with price increases of up to 50% for loss accounts and up to 10% for non-loss lines.

“Looking forward, in property-cat, our base is to soften prices gradually. But the amounts must remain sufficient, and importantly, the strong terms and conditions agreed upon in 2023 must continue,” he said. “Therefore, the insurers would like the rates to remain high for a long time, but it seems that they are more open to negotiating rates than structures, because, at the moment, the agencies are moving to get a good profit.

“We think that favorable market conditions will not end suddenly, even if the loss experience remains negative until the end of 2024. That said, the market remains nervous and any unexpected, major event that could happen during the second half of the year extends the strong market for a long time. In the risks we think that the rates will continue to vary along certain lines, but with a focus on deaths in the US, the increase in the rate should be accompanied by the cost of increased losses from social capital.

Fitch's forecast for 2024-2025

Giving his views on what the key takeaways from Fitch's insurance forecast for 2024 and 2025 mean for reinsurers, chief executive, Graham Coutts (pictured right) said the rating agency expects to see premium growth continue, generally, but at levels they have one digit. “We think that the level of sufficiency has been reached, but we expect the market behavior to continue. We expect retained earnings to decline, but it remains positive, and the decline is driven by poor performance on the casualty side. “

Consolidated ratios remain strong, although perhaps slightly lower, he said, and ROE is extremely strong at around 20%. Coutts compared that to the last time he was at RVS in Monte Carlo when the talk across the industry was about how soft the market was. That soft market was in the wake of hurricanes Harvey and Maria when the market might have expected to see some strengthening, which did not happen. So, it's obviously a very different cycle.