Reinsurers’ underwriting margins after retrocession will expand in 2023

Fitch Ratings has released a report suggesting that reinsurers’ underwriting margins after retrocession will expand by 4 percentage points on average in 2023.

Fitch maintains its ‘neutral’ sector outlook for the global reinsurance sector, as it noted this view balances stronger underwriting margins with risks linked to macroeconomic uncertainty, high claims inflation and increasing natural catastrophe claims caused by climate change.

The global reinsurance industry reached a tipping point during the January 2023 renewals, as their bargaining power with regard to their cedents moved substantially in reinsurers’ favour. Property and specialty lines entered into a hard market.

Hard property and specialty markets, the unparalleled concurrence of seismic shifts in the macro-economic environment, high geopolitical uncertainty, persistently high natural catastrophe claims and capacity limitations led to a sharp increase in premium rates, and, equally as important, a tightening of terms and conditions rarely seen in this market before.

Price hikes of 20-60% were observed in most property markets, which had been affected by natural catastrophe events throughout 2021 and 2022. Following hurricane Ian, US prices even doubled.

Retrocession prices moved up in unison, with the Russia-Ukraine war leading to price increases of 50% or more in affected specialty lines, such as political risk and aerospace.

Fitch estimate that the reinsurers’ aggregate accounting capital base declined by around 15% in 2022 largely due to mark-downs on their fixed income portfolios on the back of rising interest rates.

This is to have reinforced reinsurers’ underwriting discipline despite higher interest rates having a neutral to positive impact on economic and regulatory capital in 2023.

by Yana Keller