Russia-Ukraine war represents a “mid-sized catastrophe event” as hard market begins to ease

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

When the rating agency last updated the outlooks in 2021, it expected higher premium rates and a strong rebound in economic activity to significantly improve financial performance. 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.

Ukraine conflict and inflationary pressures

The Russia–Ukraine war has exacerbated some of the negative macro-economic trends affecting reinsurers and the London market.

Rising inflation, which was already pushing up claims costs, has accelerated. Increased financial market volatility has led to higher regulatory capital requirements and – in some cases – to investment losses due to wider credit spreads and lower equity valuations.

Pressure on economic growth could dampen demand for insurance and reinsurance cover.

Short-tail business lines are already being affected by higher claims inflation, with repair costs for buildings and vehicles rising fast. Insurers and reinsurers may be able to increase premiums accordingly, but as high inflation becomes longer-lasting, reserve deficiencies will start to arise on long-tail lines.

Claims linked to wages and healthcare costs are increasing, as are litigation costs, and Fitch expects insurers and reinsurers to have to set aside higher provisions as a result.

For the global reinsurance market and the London market, the war itself represents a mid-sized catastrophe event, mostly affecting specialty lines such as aviation, marine, political risk, trade credit and cyber insurance.

In most cases, it expects insurers and reinsurers to suffer only a hit to earnings, rather than capital depletion, and Fitch does 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.

Increased investment income on the cards

Several factors should protect global reinsurers’ and London market insurers’ credit profiles against rising claims inflation, financial market volatility and weakening price momentum, supporting neutral sector outlooks.

Capitalisation is very strong, having recovered from the pandemic losses of 2020, and underwriting remains disciplined. Fitch expects 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.