Rating agency, S&P Global Ratings has released a report that showcases how the large losses the industry has already witnessed in Q122 will further harden upcoming reinsurance renewals in 2022, and potentially even into 2023.
The rating agency explained how 2021 was an active natural catastrophe year, the fourth-costliest on record – with $111 billion of insured losses from natural catastrophes and then $8 billion of insured losses from man-made losses, giving a total of $119 billion, according to global reinsurance giant Swiss Re.
However, the report states that Q122 has also provided a “volatile environment for the sector”, even before both the Pacific and Atlantic hurricane seasons start.
In the report it shows that specialty insurance losses can add around $16 billion of insured losses in addition to winter storms in Europe, which could add anywhere between $3-5 billion, as well as the Japan earthquake in the Fukushima region, with an estimated industry loss of anywhere between $2-4 billion.
The rating agency also warns that the ongoing wildfires in Texas could also add to the industry losses too.
“While these aggregate losses are material and the global reinsurance sector will take a share of them, we do not believe the sector is immediately facing a capital threat when comparing 2022 to annual natural catastrophe budgets and other historical large tail events,” says S&P Global Ratings.
Meanwhile the report also addresses how rising inflation is adding challenges for long tail lines, as the global reinsurance sector is currently facing increasing inflation and, notably, claims inflation too.
The report states that S&P Global Ratings economists expect a world inflation of 6.0% for 2022.
Short-tail lines of business are not expected to suffer too much from this as the rating agency believes that the sector has sufficient measures, particularly through ongoing pricing increases at renewals which are typically adjusted manually.
However, longer tail lines within casualty insurance are far more sensitive to inflation considering the longer duration of those lines.
The agency added how reserve-strengthening measures have been seen before in previous years across certain US casualty lines, such as general liability, professional lines and auto liability.
S&P Global Ratings said: “Reinsurers may benefit from rising interest rates for their investment portfolios, as central banks try to curtail rising inflation. We will continue to carefully watch claims inflation versus general inflation, which could create some additional volatility for long-tail reserves for reinsurers’ earnings in 2022.”
However despite these major losses and rising inflation, the report does state that the global reinsurance sector is still well capitalised, as it entered 2022 with a “robust capitalisation”.
The report says that capital adequacy for the top 21 global reinsurers in 2021 was about 7% redundant at the ‘AA’ confidence level, and that the sector has maintained this buffer entering 2022.
S&P Global Ratings said: “We believe capital adequacy will remain a key strength of the sector and resilient to moderate stresses.”