Moody’s Investor Services is maintaining its stable outlook for the global reinsurance sector but says property and casualty (P&C) insurance prices will continue to rise, thanks to climate change, inflation and demand.
Reinsurance buyers expect prices to rise rapidly in 2023, they say, and inflation is increasing claims costs – a key risk to the stable outlook for the sector.
Moody’s says recent catastrophe losses and an increased perception of risk following the pandemic have fueled strong demand for both primary commercial and reinsurance P&C protection. “At the same time, these losses and climate change concerns have prompted a sector wide reassessment of catastrophe risk, with many reinsurers beginning to pull back capacity,” the ratings and research firm said in a statement accompanying the release of two new research reports on the global reinsurance industry.
“Reinsurers earnings had been deteriorating for more than a decade and over the last five years became weak and volatile as a result of COVID-19 and catastrophe claims,” says Moody’s vice president, Helena Kingsley-Tomkins.
Now, however, they say increased prices and higher investment yields should improve earnings over the firm’s outlook period, absent any outsized catastrophes. Price increases since 2017 have contributed to a steady improvement in underwriting results. In 2021 they say the industry achieved a normalized combined ratio of 98 per cent, its strongest since 2012. (Normalized excludes COVID-19 claims, reserve releases and above-average catastrophe losses.)
“While we expect the sector’s financial performance to improve, 2022 earnings are likely to be mixed and adversely affected by unrealized losses on bond investment and financial market volatility,” the firm writes in one report, Stronger earnings prospects and solid balance sheets underpin stable outlook. United States and Bermudian reinsurers reported strong results while European reinsurers reported weaker average combined ratios over the same period.
The firm’s research suggests that inflation is a key threat, already holding back earnings improvements in some lines. “Sustained high inflation could also increase long-term care and medical costs, elevating claims and reserving risk in long-tail liability lines,” they add.
Rising prices, coming soon
Among buyers of reinsurance surveyed by the firm, meanwhile, 40 per cent expect price increases of more than 7.5 per cent in property lines. The firm also describes increasing demand as companies seek more coverage in an inflationary environment that is driving up property replacement values.
While property coverage demand rises, they say the demand for casualty reinsurance remains relatively flat, “even though a significant majority also expect loss cost trends to continue rising,” the firm’s researchers write in a second report, Buyers’ survey indicates claims inflation is driving reinsurance pricing momentum.
“Although casualty insurance prices are not expected to increase as much as property, 82 per cent nonetheless anticipate pricing increases, with 15 per cent predicting (increases of) more than 7.5 per cent,” the firm writes. “Cedants expect longer-term trends such as rising claim costs as a result of aggressive attorney advertising and involvement in claims, third-party litigation financing and rising jury awards, as well as concerns around rising medical costs, to continue driving up casualty reinsurance pricing.”
This social inflation, they warn, could reduce reserve releases. Russian aviation losses, meanwhile, will be on par with a mid-sized natural catastrophe. They add that the conflict between Russia and the Ukraine exacerbates the risk of severe cyberattack, which could have a significant impact on earnings.
Cyber coverage inadequate: Buyers
In the firm’s second report surveying buyers, Moody’s says fewer buyers surveyed say reinsurance companies are supplying adequate coverage and risk transfer solutions for cyber risks. They expect uncertainty about the military conflict in the Ukraine will likely drive cyber reinsurance pricing higher.
“Only 37 per cent of respondents said that reinsurers currently provide enough capacity and appropriate risk transfer solutions for cyber risks, down from 50 per cent last year,” they write.
Underwriting, demand and interest rates support reinsurers’ profitability
Finally, in its first report, Moody’s says underwriting discipline and strong demand overall will push up reinsurance prices and rising interest rates will help the sector’s investment income, supporting profitability.
Rising rates also support solvency, they write. “Based on company disclosures, a 50-basis point rise in interest rates boost reinsurers economic solvency ratios by an average of 10 percentage points.”
Underlying combined ratios excluding COVID-19 losses, reserve releases and above-budget catastrophe claims fell to a nine year low in 2021, they add, “indicating better underwriting profitability.” They say that demand will also remain strong amid shifting perceptions of risk.