Analysts at Goldman Sachs expect rate firming to persist in reinsurance lines of business through the rest of 2023, with a deceleration in the January 1st, 2024, renewal rate changes, and pricing to normalise in late 2024.
Despite reinsurance pricing normalisation anticipated late next year, analysts still expect to see continued underlying margin improvement for reinsurance companies from adjustments in terms and conditions and also changes in top line rate.
Although, while higher reinsurance rates have persisted through 2023, Goldman Sachs does not feel that it has thus far been sufficient to restore multiple years of robust returns on equity.
By examining data for the Global and US property catastrophe rate on line index, analysts explored how significant rate on line rises are to the bottom line.
Analysts looked at the portion of premiums and losses attributed to property cat reinsurance, then used an average historical loss ratio from 2014-2022, applying rate on line increases in 2023 to the top line, and then calculated what the expected change in property cat reinsurance loss ratios would be.
“As expected, the greatest impacts to the LR and EPS came from companies with the greatest exposure to property catastrophe losses,” note analysts.
“However, we were surprised to see that when looking on a consolidated basis, the impacts of these pricing actions were smaller than our initial expectations, contributing to the idea that while the property catastrophe reinsurance pricing increases are significant, they have only modest implications for the overall consolidated company total, improving ROEs ~50bps-5pts only,” added analysts.