“While rising prices has understandably garnered a lot of investor attention, it’s our view that improving terms and conditions, and attachment points in particular, are far more material to the reinsurance industry’s risk profile,” suggest analysts at investment bank Jefferies.
Jefferies analysts state that from their perspective, the 1H 2023 results are demonstrating that despite elevated insured natural catastrophe losses, reinsurers have incurred a far smaller proportion of the claims than they have historically.
“While most investors have focussed on the fact that reinsurance prices are now at all-time highs, we’ve argued that the shift in terms and conditions is actually more material to margins than lifting the premium income,” the analysts explain.
Jefferies notes that most importantly, lifting the attachment point (a.k.a. excess or deductible) means that a smaller volume of catastrophe claims are covered by reinsurance programmes and those that do are materially less costly.
The investment bank says that after six consecutive years of elevated natural catastrophe losses, the “active” first half of 2023 presents further challenges to the global industry and fuels price rises for policyholders.
Citing Aon’s estimates, Jefferies states that in 1H 2023, there were $53bn of insured natural catastrophes, which is +46% above the 21st-century average.
Factoring in uninsured losses, the 1H 2023 economic cost is estimated at $194bn, the 5th highest first half on record, the highest since 2011, and materially ahead of the average of $128bn. Alongside Aon’s $53bn, Gallagher estimates $52bn, while Munich Re estimates $43bn.
Though, Jefferies observes 2023 to be different to previous years in one critical aspect; a far greater proportion of claims are now being retained on the insurer’s balance sheets, rather than being ceded to the reinsurers.
“As we approach the mid-point in the 1H 2023 results, this point is evident when comparing the earnings volatility of insurers, with the exceptional margins of many reinsurers,” the firm concluded.
