Analysts at BMO Capital Markets have said that it will take some years for the elevated cost of reinsurance coverage to get fully passed through by primary insurers, if they are even fully passed through.
BMO Capital Markets explains that underlying property-replacement cost inflation has already been running at between 6% and 10% in the U.S. over the past 24 months, which insurers have not fully priced in, until recently.
As a result, analysts question how much elevated catastrophe levels and alterations to reinsurance programs are priced into forward expectations.
“If we assume that 10% of elevated CATs in recent quarters bleed into forward expectations, it implies a ~2% hit to EPS on average across our coverage,” says the firm.
Analysts note that insurance companies’ operating return on equity (ROE) volatility has risen in recent times, while the average catastrophe loss ratio has also risen as primary insurers face retaining more frequency losses than in the past.
Additionally, reinsurance models led by RMS and Moody’s are reporting an extra 5% – 12% of underlying weather and social inflation, which alongside rising reinsurance costs and the impacts of inflation, means that, in many instances, “property prices need to rise by 25% immediately just to keep margins flattish on a modeled basis,” says BMO Capital Markets.