Long known for its resilience, especially through the recent financial crisis, the reinsurance industry is about to experience a new competitive landscape that will lead to pressure on earnings, notes international rating firm Fitch Inc.

Yet, the report, “Global Reinsurance Review and Outlook,” says the key challenges facing reinsurers are unlikely to impede the stability of earnings and current strong levels of capitalization for the majority of reinsurers over the next 12-24 months. Accordingly, subject to normal catastrophe experience, Fitch’s rating outlook for the global reinsurance industry remains stable.

"The relative attractiveness of the reinsurance operating environment has resulted in an intensification of competitive conditions, and prospects for continued strong earnings have diminished for many global reinsurers," says Chris Waterman, managing director in Fitch Ratings' insurance group in London. "Fitch considers that the next 12-24 months will prove to be a period of notable differentiation between companies."

According to Fitch, pressures are beginning to mount as premium rates edge lower. Further, there is reduced demand for reinsurance capacity among cedants, and reinsurers face continuing challenges in generating sustainable levels of investment income in the current low interest rate environment.

Reinsurers are also contending with a variety of complex regulatory issues, notes Fitch, including the introduction of Solvency II, which require adaptation to a modified competitive landscape. Fitch believes that these challenges, although significant, are manageable for most reinsurers and remain within normal cyclical expectations.

In its review, Fitch reports that many of the traditional drivers of reinsurers' historical profitability, such as investment income and the release of prior-year reserves, are unlikely to support earnings over the near-term. As a result, the agency views underwriting discipline and proactive cycle management as critical to reinsurers' future profitability.

The ability of reinsurers to successfully execute on cycle management strategies will vary significantly across the sector. Fitch considers that the next 12- to 24 months will prove to be a period of notable differentiation between companies. Those that are successful will be defined by their ability to manage their underwriting exposures by exiting or cutting back on lines of business that are no longer technically profitable.

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