Fitch Ratings has revised its global reinsurance sector outlook to ‘improving’ from ‘neutral’ to reflect the sector’s strengthening financial performance into 2024. Rising reinvestment yields and strong demand for reinsurance should increasingly support earnings.
Near-term price rises are likely to outpace increases in claims costs and we expect underwriting margins to peak next year.
Fitch forecasts the sector’s combined ratio to be 94% for 2024 and expects its near-term return on capital to exceed its 8%-10% cost of capital.
Global reinsurers are cutting back on the cover
Analytics believe pricing for natural catastrophe risks will better reflect the impact of climate change on claims, particularly as several reinsurers are cutting back on cover for medium-sized natural catastrophe risks, making pricing less competitive.
According to Natural Disaster Trends, most natural disaster databases show a significant decline in the number of annual global events prior to 1980. 3 global drought events were among the 10 costliest disasters, which underlines the growing significance of the peril on a global scale. These occurred in the United States, Europe and China. But data analysis has not completely removed the data gap, it has made major progress in identifying a large portion of events.
While the biggest disaster events are typically captured and are the most important to explain total losses most small and medium-sized events are often missed.
According to Global Reinsurers Underwriting Review, reinsurers are cutting back on the cover they provide against medium-sized natural catastrophe risks due to investor pressure after several years of large catastrophe losses and improved profitability in other parts of the market.
Fitch Ratings’ Global Reinsurance Forecasts
|Net premiums written||183,820||197,610|
|Net prior-year favourable reserve development||4,150||3,780|
|Calendar-year combined ratio (%)||93.8||94.0|
|Accident-year combined ratio (%)||96.1||96.0|
|Accident-year combined ratio excl. catastrophes/Russia (%)||87.1||87.0|
|Shareholders’ equity (excl. Berkshire Hathaway)||170,766||184,431|
|Net income return on equity (excl. Berkshire Hathaway) (%)||13.9||13.6|
Some companies were already retreating from the property-casualty reinsurance market in 2022 but even the strongest reinsurers have now pulled back, largely through tightening their terms and conditions to limit their aggregate covers and low layers of natural catastrophe protection (see TOP 20 Largest Reinsurance Groups).
This leaves primary insurers much less protected against secondary peril events. However, reinsurers still offer ample cover against the most severe events. The reinsurance market appears to have returned to its pre-soft market state of providing capital protection for cedents, rather than earnings protection.
NatCat reinsurance has become largely loss-making
Natural catastrophe business has become largely loss-making in recent years as prices have failed to keep pace with increasingly frequent, severe and volatile weather-related losses due to climate change.
This has reduced reinsurers’ appetite to provide natural catastrophe cover, particularly as other business lines are now benefitting from price rises that are higher than claims inflation.
Tighter terms and conditions for natural catastrophe cover are a structural improvement that should benefit reinsurers’ risk profiles in the medium term as they are unlikely to be quickly reversed even when market conditions change.
There were insured natural catastrophe costs of USD53 billion globally in 1H23, which is 47% above the 20-year average, according to the broker Aon.
Reinsurers reported underwriting profitability
Nevertheless, the 18 non-life reinsurers reported strong underwriting profitability in 1H2023, with an aggregate reinsurance combined ratio (claims and expenses to premiums) of 88% (1H22: 89.4%).
This was driven by the above-claims-inflation price increases in many business lines, as well as the lower natural catastrophe burden as cedents retained more of the losses themselves. The aggregate ratio included moderate losses of 6.7pp from natural catastrophes.
Meanwhile, profits in life reinsurance returned to pre-pandemic levels thanks to significantly lower excess mortality claims linked to the pandemic, and investment performance benefited significantly from a rebound in equity markets and higher reinvestment rates as interest rates stabilised at higher levels.
Reinsurance price momentum continued during the June and July 2023 renewals. US property-catastrophe markets had the largest price rises, with 30%-75% increases for loss-hit business and 10%-40% for loss-free business. In contrast, premium rates for casualty lines were broadly stable, reflecting the greater capacity allocated to them.
Fitch expects reinsurers to maintaining strong underwriting discipline despite higher interest rates and for reinsurance market hardening to persist into 2024.
However, price increases are likely to be more moderate than in 2023 as rate adequacy has generally been reached through several rounds of hardening since 2018.
Edited by Oleg Parashchak – Editor-in-Chief at Beinsure, CEO Finance Media Holding