Due to a combination of strong underwriting profitability and positive investment income, the P&C sector resulted in a very successful year, according to DBRS Morningstar, which also reported that reinsurance companies performed significantly better compared to 2020, despite higher catastrophe losses.
However, the Russia-Ukraine conflict, climate-related losses, and legacy COVID issues weigh on the outlook for 2022, as the market volatility resulting from the ongoing conflict is already affecting equity market valuations of insurance companies, its analysts say.
Swiss Re estimates that aggregate global insured catastrophe losses for 2021 were $112 billion, compared with $81 billion for 2020, the fourth highest on record.
The top events were Hurricane Ida, which caused between $30 billion and $32 billion in insured losses, and winter storm Uri, which was estimated to have caused $15 billion in insured losses.
Underwriting income improved in FY2021 compared with prior years, and the combined ratio (calculated as incurred losses and expenses as a percentage of earned premium) is lower than in any of the past four years.
The average combined ratio was in the high 90s, with the majority of selected companies reporting figures of less than 100%.
The analysts also reported that the average combined ratio for the selected group of reinsurers improved to 98.1% for FY2021 from 103.2% for FY2020.
This is in large part because of the ongoing favourable pricing environment, resulting in a sustained increase in reinsurance rates globally, which is expected to continue into 2022.
P&C reinsurance companies are major investors in the equity and bond markets. Equity markets had rebounded from the disruptions caused by the coronavirus pandemic which has contributed to net profitability for many P&C reinsurers.
However, the markets are rattled by uncertainty following Russia’s invasion of Ukraine, leading to the equity markets trending downwards since the hostilities began, and the slide may continue if the conflict is not resolved within a short period of time.
European reinsurers are also exposed to currency risk from investments held in Russian rubles, a currency that has significantly declined in value after the attack on Ukraine and subsequent economic sanctions imposed by the West.
The fallout from the Ukraine conflict may negatively impact investment performance through lower equity market valuations and lower bond market values as central banks act to curb higher inflation expectations.
Insured losses directly resulting from the conflict are not expected to be material for global reinsurers because damages caused by acts of war are typically excluded from insurance coverage.
As such, for the reinsurance industry generally, the effect of the conflict on investment portfolios is more significant compared with insured loss exposure to the region.
DBRS Morningstar’s outlook for the P&C reinsurance market remains positive, with renewal rates still trending upward and economic activity increasing globally.
The agency anticipate that the reinsurance industry will be able to maintain strong capitalisation in the near future as some companies issue new equity and debt, while benefitting from an insurance market that continues to experience a favourable pricing environment.