Reinsurers are to face a complicated and challenging 2023 with increasing uncertainty, warned Ari Chester, SiriusPoint’s Head of US and Canada Reinsurance, in an interview with Reinsurance News.
According to Chester, while reinsurance supply remains very competitive, dynamics are shifting, like in the property markets. Additionally, he noted, with the prospect of continued inflation and recession, there is an emerging concern among reinsurers as they worry if rates will stay ahead of loss trend.
He said: “Monetary inflation is a major concern. If rates continue to rise by 10% and inflation is at 7%, real rate hardening is only 3%. That’s uninspiring. Keep in mind, inflation has a compounding effect in higher casualty layers – in which case, 10% could be inadequate. Additionally, if inflation exceeds current modelled expectations, then there’s material reserving risk.
“Aside from monetary inflation, social inflation is exacerbated by the continued growth in litigation financing. We can debate how widespread the impact of social inflation has been. But, particularly in auto, we are seeing indications that social inflation is having impact. And we can’t be complacent as litigation financing continues to attract capital.”
As mentioned above, supply remains very competitive according to Chester, and in 2023 casualty markets may become more competitive. Particularly as reinsurance capacity needs to re-deploy and generate income outside of property, he highlighted.
He said: “In primary markets, there is competitive zeal from newer MGAs seeking justification of their platforms. In the commercial auto space in particular, we are seeing rate competition as MGAs seek to hit premium targets. This is likely a self-correcting process as the losses will not be far behind. But, in the near term, this is dampening the hard market.”
At the macro level, Chester noted, higher float income from long-tail lines is a mixed blessing.
“This allows significantly higher ROEs (return on equity), but potentially, could result in deterioration in results as companies allow for lower underwriting margins,” he said.
“Another macro concern is the widespread view that in 2023 we will see recessionary conditions, he added. “Some lines, including workers’ compensation and directors & officers, tend to be impacted by economic conditions: lower share price or higher unemployment, result in increased indemnity. General liability markets may also be strained, especially contractors as construction slows down.”
He concluded: “As a tailwind, distress in property markets could bolster casualty demand. In particular, less well capitalized ceding companies that fall short of their property targets may need more surplus relief from higher casualty cessions.”