Analysts at Goldman Sachs believe that the reinsurance pricing cycle could catch up with the primary cycle through 2022 and into 2023.
Despite the market now being five years into a hard cycle, Goldman Sachs notes that the traditional industry has remained strongly capitalised, meaning the supply of reinsurance has been comfortably able to meet demand.
Hence, price increases in reinsurance have lagged price increases in the primary commercial insurance cycle where the barriers of entry are higher and capital inflow is more difficult.
But following yet another year of elevated catastrophe losses, concerns over what the new normal of weather losses will look like due to climate change should provide a boost for reinsurers, analysts say.
Interestingly – and uniquely for an insurance cycle – the reinsurance cycle going into 2022 and 2023 looks to be driven more by risk aversion than a lack of capital, they added.
Preliminary estimates from Guy Carpenter show that January 1st 2022 property catastrophe reinsurance pricing increased by 10.8%, more than double the 4.5% increase reported in January 2021.
The larger 2022 increase is partly due to steeper increases in European pricing, which is a significant contributor to January pricing, owing to record losses from the European floods in July.
Price increases have also led to an improvement in underlying profitability, with normalised combined ratio for all European reinsurers gradually reducing since 2019.
Goldman Sachs expects this trend to continue as the benefit of price increases gradually comes through, leading to above-cycle ROEs over the next three years.
Moreover, it believes economic recovery should aid top-line growth over and above pricing tailwinds, in addition to the boost from climate change concerns.
