RBC Capital Markets has said that underwriting conditions in natural catastrophe are hardening materially.
A new note from the firm says that the industry has had little respite with loss experience being poor since 2017 when Hurricanes Harvey, Irma and Maria struck.
It wrote: “This is in contrast to prior periods when losses normalised or were even benign in some years that allowed for capital regeneration. As we pointed out in the earlier initiation on the Specialty names, the multitude of risk factors at play is the driving force behind this sustained period of rate increases despite there being no shortage of capital. Reinsurance market conditions, within nat cat risks in particular, appear to have hardened through 2022.”
The reason for driving up of catastrophe rates, wrote RBC, is not so much the lack of availability when it comes to capital, but its deployment. This, said the firm, is ‘more disciplined now’.
The firm also predicted that reinsurance rates would further harden.
It wrote: “Rates are typically a lagging indicator of underwriting experience, as rates tend to react towards loss trends. Yet cat rates have accelerated this year despite the cat loss experience being milder so far when compared to previous years. Cat rates are up c10% this year, the largest annual increase since 2012, and are exceeding both commercial and reinsurance rates.”
RBC also drew attention to the current inflation rate, now topping over 9%. It said that while the insurance market is used to fluctuations in the interest rate, this is the first time in decades that inflation has been so steep across major mature economies.
It wrote: “Insurers are wary of general inflation as they will have to adjust their pricing and underwriting to a new market environment. In highly exposure lines of businesses (re)insurers have applied as high as double-digit loadings to account for inflation. Notwithstanding a deteriorating macroeconomic backdrop, general inflation trends do not show an historical direct correlation to claims inflation.”
It added: “General inflation tends to have the most impact on short-tail lines such as property and certain specialty risks. For long-tail lines, such as liability risks, social inflation is a more relevant driver than general inflation. Nonetheless, the reinsurers have been acting proactively to manage inflation risk exposure. Apart from incorporating inflation loadings in renewal pricing, reserves have been strengthened in some cases while inflation-linked assets are used to hedge changes in inflation levels as well.”
