Reinsurance News

Further momentum ahead as outlook for reinsurance sector improves: Peel Hunt

25th November 2022 - Author: Kane Wells

In a recent report, Peel Hunt has suggested there is further momentum ahead as the outlook for the reinsurance sector improves, complementing the already attractive returns being generated in the specialty insurance market.

Peel HuntThe firm proposes that rising interest rates will likely improve investment income in 2023 and that reinsurers will be much better paid to absorb the volatility that natural catastrophe exposures bring.

It adds some brokers and underwriters expect that rate increases across property catastrophe lines may reach +20%-30% above inflation next year, spread across the European and US renewals, which includes changes to terms and conditions.

US property catastrophe rates have performed better than European rates since 2016, says Peel Hunt, as Hurricane and secondary peril losses were higher.

However, the firm adds that in recent years, secondary perils such as floods and severe weather have increased in Europe and therefore, expects US rates to accelerate and European rates to catch up during the 2023 renewal season.

Artemis ILS NYC 2023 conference

Peel Hunt notes that “With inflation continuing to be a headwind in 2023, we believe the specialty insurance sector offers an adequate hedge against rising cost inflation and liability claims.

“Specialty insurance rates are priced above inflation and whilst rate increases are likely to slow down in insurance they will remain adequate in our view.”

The specialty insurance market has reached rate adequacy following five years of broad-based, high-single to low-double-digit rate increases, says Peel Hunt, and the reinsurance sector is now likely to follow.

The firm suggests that there is evidence in Bermuda and the Lloyd’s Market that the underwriting reforms implemented at the bottom of the soft market are now delivering improving underwriting margins and are helping lift the quality of the specialty insurance portfolios.

This will render higher earnings buffers across the sector and should help absorb the rising volatility that property catastrophe exposures bring, says Peel Hunt.

Meanwhile, the firm observes that lacklustre RoE (return on equity)in the specialty re/insurance sector over the last five years (as a result of increased man-made and natural catastrophe events) masks the underlying improvements that were made across the sector to boost underwriting quality, lower volatility and increase underlying underwriting margins.

As for 2023, Peel Hunt expects that RoE should improve, adding, “The repricing we saw across specialty insurance classes since 2017, the rise in interest rates boosting investment income and the expectation for a sharp increase in the returns that can be generated in property catastrophe reinsurance classes will likely help lift RoE’s to around 17% according to consensus expectations.”

Peel Hunt concludes that while the likelihood and severity of major events are uncertain, It believes re/insurers will be better rewarded to take on these risks as rates harden in a dislocated property catastrophe reinsurance market, as the potential to generate high-teen risk adjusted returns across a portfolio of specialty insurance & reinsurance classes are becoming increasingly attractive.

Print Friendly, PDF & Email

Recent Reinsurance News