Aon’s January Reinsurance Market Dynamics report: Macro Conditions: Extreme Volatility, cites 2022 as being tricky for the industry, with inflation hitting multi-decade highs, as well as interest rates rising to an almost “unprecedented pace”.
The report also noted that equities had their worst year since 2008, and for the first time in 20 years, the euro hit parity with the dollar.
Aon stated that all of these factors contributed towards making what was always likely to be a complex renewal season “even more challenging”.
According to the report, short tail lines, including property and motor damage, bore the brunt of claims inflation, as rebuilding costs and used car prices shot up. Casualty lines however, fared better, likely due to them typically being more geared to wage and medical cost inflation.
At the moment, these are generally running below consumer price inflation (CPI). Nevertheless, several major reinsurers strengthened reserves during the year on the back of inflationary pressures.
The report adds that in the US inflation has fallen 2% since a summer high of 9%. Economists polled by Bloomberg forecast a steady decline to below 3% by Q124.
To help tame inflation, central banks have been raising interest rates. The US Fed raised its benchmark policy rate on seven occasions across 2022, ending the year at 4.25-4.5%, the highest level it’s been in 15 years. At the same time the European Central Bank hiked its main lending rate from 0% to 2.5% H222, and expects to raise rates again this year.
Aon highlighted how higher rates should meaningfully enhance the “long-run profitability” of the reinsurance industry.
The report reads: “Reinsurers primarily invest in bonds and make significantly more money from investment returns than they do from P&C underwriting. However, it will take time for the full benefit to emerge in earnings, as maturing investments are reinvested in higher yielding assets.”
Furthermore, Aon noted that another major contributor to the large fall in reinsurers’ capital positions we saw across 2022 was equity markets, with it being the worst year for world stock markets since 2008.
This environment made it significantly more difficult for both existing players and potential new entrants to the reinsurance market to raise capital, despite rapidly hardening price conditions.
Moreover, most economists are now forecasting a global economic downturn to take place in 2023.
The report also noted that a recent Bloomberg survey puts the average expected growth at just 1% in the US and -0.1% in the eurozone.
However, while P&C re/insurance often fares better than the majority of other sectors in economic downturns because insurance is not a discretionary product, Aon warned that further increases in credit spreads or falls in equity markets could put additional pressure on reinsurer balance sheets in the future.
Meanwhile, Aon’s Reinsurance Aggregate (ARA), has reported a net combined ratio of 98.2% for 2022.