Law360, London (September 11, 2020, 3:59 PM BST) -- Reinsurers are still not clear about how much they will have to pay out on claims linked to the COVID-19 pandemic, Fitch Ratings has warned, as it reaffirmed a "negative" outlook for the sector.
The ratings agency said on Thursday that reinsurance companies would raise prices when policy renewals become due, but that any increase in profit would be offset by a rising number of claims and persistently low interest rates. It is the second gloomy forecast for the sector in a week.
Fitch said that, for these reasons, it is not changing its position on the outlook for the sector, which it shifted to negative in March.
"Fitch expects the favorable price environment for reinsurers to continue into 2021, leading to a better underlying technical profitability of the sector," Brian Schneider, senior director at the ratings agency, said. "However, mounting losses caused by the coronavirus pandemic and the increasingly low-interest-rate environment will weigh negatively on the sector's financial performance in 2020 and 2021."
Another ratings agency, Moody's, shifted its outlook on Monday for the reinsurance sector to negative, again over concerns about interest rates, which have remained either very low or in negative territory.
Fitch said the losses that the sector would ultimately have to bear from COVID-19 claims remained "largely unknown." That was because it is possible that some claims could be disputed in the courts.
"Business interruption claims may be subject to legal disputes, while credit and surety losses take time to materialize after the onset of a recession," Fitch added. "Liability claims are often in numerous segments that will entail lengthy litigation."
The company said it was unlikely to downgrade the financial strength ratings of individual companies unless there was a "very extreme catastrophe event" or a severe deterioration in the COVID-19 crisis.
S&P said on Tuesday that reinsurers could be forced to dip into capital reserves if natural catastrophe claims this year match the $59 billion in insured losses in 2019. Reinsurers would face a temptation to make full use of better pricing at renewal time to bolster flagging profits, but they would increase exposures to natural catastrophe claims, the ratings agency added.
--Editing by Ed Harris.
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