It is not the reinsurer’s ability to pay the claims but the ability to replenish the reserves which is of major concern as the capital markets are either uninterested or unable to promise an injection of funds should the industry have another significant claims shock.

Fitch says it is concerned that insurers’ access to capital markets may be restricted as a result of global economic weakness. The agency believes there is an elevated likelihood that reinsurers could be forced to operate with weaker capital bases for a prolonged period of time.

“This represents a heightened vulnerability for the reinsurance sector,” says David Stephenson, Director, in Fitch’s Insurance rating group.

His view was echoed by Mark Rouck, a Senior Director at Fitch who adds: “Volatile conditions in capital markets persist, and these continue to create uncertainty over the availability and affordability of new capital in the event of significant need.”

Fitch adds that reinsurers with a strong focus on property catastrophe risks that incur outsized losses relative to peers, or relative to market share in affected regions, are most vulnerable if refinancing options remain scarce.

“In Fitch’s view, additionally, reinsurers lacking underwriting track records or previous histories of meaningful capital markets access could be pressured,” it adds. “Large global reinsurers with a longer underwriting history and track record of accessing capital markets are more likely to be able to withstand and recover from a significant catastrophe loss.”

Key near-term rating concerns also include non-life reinsurers’ accident year underwriting profitability, with the expectation that 2009 underwriting margins will narrow and reserve development will have a less favourable effect on underwriting profitability than it has in recent periods. 

The agency continues to have concerns about life reinsurers’ ongoing exposure to capital markets volatility due to their higher investment leverage than non-life peers.

However it is not all bad news with Fitch saying that despite the concerns expressed it believes that the reinsurance sector will be one of the first risk sectors to return to a stable rating outlook in its universe of ratings coverage.

To do so would require a return to capital markets conditions that suggest reinsurers would have access to reasonably priced funding enabling them to rebuild capital after a major catastrophe event.