Analysts at Fitch Ratings believe that commercial insurance price momentum peaked last year, meaning insurer profits are likely to reach a high in 2023 and weaken thereafter.
In a new report, the rating agency notes that price increases since 2017 helped regain healthy profitability in 2021, but warns that price momentum is losing steam in 2022 – coinciding with rising risks from economic inflation, climate change and cyber.
High underwriting losses, ultra-low interest rates, rising natural catastrophe claims and the Covid-19 pandemic have put the sector’s earnings under immense pressure and led to global price increases for 17 consecutive quarters.
Major European commercial insurers returned to strong profitability in 2021 as the pandemic no longer hid the underlying earnings improvement, meaning insurers were able to support their group’s profitability for the first time in many years.
But Fitch says that increasing competition and improved profitability slowed price increase momentum in most property and casualty lines of business over 2021.
Cyber insurance was the only exception to this trend as ransomware attacks multiplied and subsequently triggered pricing corrections, which Fitch expects to continue in 2022.
Risks related to economic inflation, climate change and cyber are also rising, with more prolonged higher economic inflation making claims trends less predictable and possibly leading to margin pressure in property and reserve deficiencies in casualty.
And these risks have only been heightened by continued economic uncertainty in the aftermath of the Covid-19 pandemic and the Russia–Ukraine war, which in turn makes claims trends less predictable for commercial insurers. Fitch believes that such a scenario could lead to margin pressure in property lines of business and reserve deficiencies in casualty lines of business.
Fitch warns that commercial insurers are also heavily exposed to climate change through rises in the frequency and severity of natural catastrophe claims, and as underwriters of and investors in corporates, whose business models might suffer from climate protection laws.
Finally, the strong rise in ransomware attacks in 2021 highlights the challenges of cyber insurance underwriting, as limited historical data and the line’s systemic nature will limit the risk appetite of commercial insurers.
