Rating agency AM Best has reported that non-life reinsurers are experiencing their strongest pricing momentum in recent history, despite new market entrants, robust capitalisation, and further alignment with third-party capital providers’ interests.
While AM Best anticipates continued pricing improvement throughout 2022, the impact on overall premium may be more complex to measure as reinsurers refine their risk appetites and exposures to working layer coverages.
In 2021, re/insurers benefited from substantial rate increases across various lines of business.
However, secondary perils such as Flood Bernd in Germany and Winter Storm Uri in Texas highlighted another year of substantial catastrophic activity.
Additionally, global supply chain disruptions and labor shortages increased the labor and material costs for repairing damaged homes.
The rating agency expects modest pricing gains through the remainder of 2022 after the heightened loss activity dragged underwriting results in 2021. Rate improvement may disappoint in certain lavers of catastrophe lines, where the presence of alternative capital continues to mute pricing gains.
In the absence of better investment options emerging, AM Best does not expect third-party investors to pull back broadly from the natural catastrophe reinsurance market.
The level of alternative capital, particularly in the CAT bond market, remains significant, despite sizeable losses and capital trapped longer than anticipated, due to the elevated catastrophe activity of the past several years.
Social inflation supports pricing momentum in the casualty lines, although the impact of social inflation was muted as courts closed owing to COVID-19 outbreaks.
As economies rebound to pre- pandemic levels, AM Best expects social inflation to drive higher loss costs in the casualty lines and, as a result, subsequently drive rate increases.
Higher global economic inflation, resulting from accommodative monetary policies that have been in place for some time, will add to the rate pressures caused by social inflation.
The US Bureau of Labor Statistics reported a 79% increase over the previous year in February 2022, the highest in level in 40 years.
Underwriters must address the impact of higher economic inflation for the first time in ears. If central banks raise interest rates to combat inflation.
Underwriters will find relief in the form of higher investment yields. However, turning over fixed- income portfolios will take time, so any improvement in net investment income will be gradual. AM Best, therefore, expects reinsurers to concentrate on underwriting profits rather than investment float.