Insurers are likely to have to accept mid-teen reinsurance rate rises next year, just to cover inflation and climate risk, if they wish to transfer the same level of risk to reinsurers, according to Peel Hunt analysts.
At the Reinsurance Rendezvous conference last week, Peel Hunt highlighted that current inflation, which is running at c.10%, is an important trigger that could cause a reinsurance capacity shortfall in property catastrophe classes at the January 2023 renewals.
Because of this, analysts have observed that reinsurers are baking their own inflation expectations into pricing, basing it on an extensive use of insurers’ and their own proprietary data.
Additionally, reinsurers are applying revised inflation assumptions to their risk exposures by: a) increasing the attachment points above which reinsurers are liable to pay losses, and b) adjusting the limit (exposure) that is being reinsured.
Alongside inflation, climate change is another factor that is driving property catastrophe reinsurance rates up, as reinsurers try to address elevated earnings volatility and low returns on capital, analysts noted.
Reinsurers are increasing property catastrophe limits – particularly for secondary perils exposures – by an additional mid single-digit percentage point to take into account climate-induced higher loss cost trends.
On top of buyers having to accept mid-teen rate rises next year, analysts said that reinsurers are likely to charge a premium above this in order to lift investor returns towards the cost of capital and ensure the reinsurance sector’s access to growth capital in the long term.
Analysts concluded that if insurers become reluctant to accept a steep increase in reinsurance rates, they will have to accept lower cover and retain more risk, or transfer risk to captives rather than the private reinsurance sector.
