Analysts at Moody’s expect the supply and demand imbalance in the global reinsurance market to persist amid a continuation of strong pricing, while credit conditions will also be supported by improved investment income on the back of rising interest rates.
Moody’s maintains its stable outlook for the global reinsurance sector in 2023, but warns that its exposure to natural catastrophe events remains inherently high, exacerbated by the impacts of climate change, while both economic and social inflation trends are also a threat to earnings going forwards.
However, with prices at multi-year highs, driven by heavy loss years and inflation, Moody’s expects further improvement in the sector’s underwriting performance.
“The January 2023 reinsurance contract renewals marked a sharp acceleration in the pace of price increases for property reinsurance, and showed continued strength in specialty and casualty reinsurance lines,” say analysts.
Since 2017, reinsurers have navigated above-average catastrophe losses, with annual insured losses from nat cats in 2022 once again exceeding the $100 billion, and by some distance.
Although 2022 included Hurricane Ian, which is widely viewed as the second most costly single nat cat event ever absorbed by the market, previous years were characterised by heightened losses from secondary perils, such as floods, convective storms, winter storms, and wildfires. In fact, over the past five years, secondary perils have accounted for more than 60% of total insured cat losses.
As a result, there’s been somewhat of a reassessment of catastrophe risk, which led to some reinsurers cutting their exposure or pulling out of catastrophe coverage altogether.
“To date, limited new capital has entered the market from traditional reinsurers. Inflows from alternative capital providers such as pension funds, which take on reinsurance risk by investing in insurance linked securities (ILS) such as catastrophe bonds, have also stagnated,” say analysts.
According to Moody’s, while recent catastrophe modelling enhancements and “the most favorable pricing conditions in over a decade” are positive for the industry, there’s doubt around the industry’s ability to price risk at the levels required to deliver strong returns on capital long-term.
As well as an improved underwriting result, Moody’s expects reinsurers to benefit from the rapid rise in interest rates that occurred in 2022, as it supports higher investment returns.
“When rates rise, reinsurers are able to invest new premiums and reinvest proceeds from maturing securities into higher yielding assets, delivering an increase in overall investment income. Reinsurers which do not have life operations typically have lower asset and liability durations, and therefore begin to benefit from the uplift in investment income relatively quickly,” say analysts.