Analysts at JP Morgan have suggested that the reinsurance market shift is an opportunity for companies to re-set profitability and rebuild buffers.
JP Morgan’s analysts state that additional exposure growth on top is a bonus, though this is not something that the firm is looking out for.
They write, “For the first time in many years, we believe that the reinsurance renewals did not let the market down.”
JP Morgan notes that various headlines from the reinsurance brokers report that Global Property catastrophe pricing has reached highs across many regions, including the US. (Where, according to Aon, Property Cat business exceeded mid-2000s highs.)
Alongside material pricing improvements, terms, conditions and structures of programmes also improved to the benefit of the reinsurers, suggest the analysts.
Though while property catastrophe makes up a significant proportion of the reinsurance business, it is “by no means the whole picture.”
Therefore, whilst the analysts observe evidence that pricing has improved for all lines of business, overall combined ratios and margins will not improve by the 30%+ increases seen in property catastrophe lines of business.
“At this stage, we do expect price increases to meaningfully accelerate year on year. We expect that the re-set in profitability will become clearer as the year progresses. We have seen evidence so far that reinsurance structures have changed with the reinsurers getting further away from frequency type losses,” the analysts write.
They continue, “We expect rate increases reported by the reinsurers to be more muted vs the increases in the Guy Carpenter ROL index because the index only represents the property catastrophe business (price increases in other lines are likely to be lower) and generally reinsurers will report pricing on a risk-adjusted basis.”
Given the scale of the nominal price increases, JP Morgan anticipates the reinsurers to downplay the increases, showing that these were justified due to far higher loss cost assumptions including on inflation.
The analysts note that the largest reinsurers (Munich Re and Swiss Re) typically risk adjust their pricing metrics to take account of changing claims trends.
These adjustments include the cost of inflation and assumptions on catastrophe losses.
JP Morgan concludes, “Both of the companies tend to use conservative assumptions and therefore their inflation assumptions are likely to be cautious particularly given the surprisingly high levels of inflation that we have seen in 2022.
“Given the scale of the surprise on inflation, we have seen some minor reserve additions but so far these have mostly been absorbed within reported results.”