Reinsurance price increases are expected to carry on into 2023 renewals, according to a new report from S&P Global Ratings, the Global Reinsurance Highlights 2022 report.
“Sophisticated levels of risk management should sustain the industry’s capital adequacy and we expect it to remain a strength for the sector,” says the report, adding that the global reinsurance sector could finally be facing a turnaround. That said, the ratings firm adds that its view on the global reinsurance sector remains negative.
“The question on everyone’s mind is will these pricing improvements be enough to combat the endless barrage of headwinds against the reinsurance sector that have muted returns for years?” the report asks in its article Is The Global Reinsurance Sector About To Turn A Corner?
“Inflation has lasted longer than economists anticipated and has been more severe,” they continue. “Over the past several years, the P&C re/insurance industry has been dealing with social inflation, especially in the U.S. casualty lines, and now CPI inflation.” They point out that even Japan has swung from its historic deflationary position to 2.2 per cent inflation in 2022. “What was once considered a transitory phenomenon has shown persistence and caused rapid change in central banks’ course of action.”
They continue saying risk is also increasing for reinsurers as inflation elevates claims costs and potentially affects underwriting results from current and prior accident years.
They add that the industry has a poor track record when it comes to earning its cost of capital. “Although underwriting performance in P&C and life reinsurance is improving in our base case assumptions in 2022-2023, we believe the sector still needs to demonstrate its ability to sustainably earn its cost of capital before we could potentially review our view to stable from negative.”
The report also examines combined ratios, the magnitude of losses exacerbated by urbanization, higher asset values, underestimated exposures, supply chain disruption, increased material costs, labour shortages, inflationary pressure and the effects of climate change.
Pricing, meanwhile, has become an increasingly dynamic process in recent years. They say while reinsurers are getting required price increases, rate adequacy, particularly in property catastrophe, “is questionable.” This, they say, reflects the divergence of strategies among reinsurers in this line of business. “The pricing, which should be an indicator of prospective loss trends, seems to be an uphill struggle for the past several years,” they write.
Growing concern about Russia’s invasion of Ukraine has also altered perception of risk in specialty lines. They say aviation is a key focus area in particular, with potential large losses which could result in sizable rate increases later this year and into 2023.
“The reinsurance sector’s performance over the past five years has been dismal,” they conclude. “We believe fundamental, disciplined underwriting and adequate risk pricing, tighter terms and conditions with clear exclusions and overall sophisticated risk management are key if reinsurers are to defend their competitive position and preserve earnings and capital strength.”
To learn more about S&P’s views on the reinsurance sector, consult this article: Performance under pressure. Insurance Portal will publish two more articles this week on S&P’s reinsurance sector research.