New Telegraph

Disasters: $100bn claims force reinsurance rates up by 30%

A major focus on the global reinsurance industry has shown a slight angst towards the impact of natural catastrophe on the profitability of the operators. Quoting Gallagher Re, Atlas Magazine reports that reinsurance rates for natural catastrophe risks in the USA have increased by 50 per cent for the January 1, 2024 renewals. This is just as Guy Carpenter had also reported that these rates had gone up by 30 per cent worldwide.

This surge in rates is the result of the high cost of natural catastrophe claims, estimated at $100 billion in 2023. Aviation reinsurance prices have also soared by 25 per cent, while war risk premiums for ships entering the Red Sea are now 10 times higher than they were at the beginning of the conflict in the Middle East. It also reported that in a context of high volatility, the 2022 reinsurance market had shown a mixed picture, adding that after several years of underperformance, reinsurers have adopted a more cautious technical approach over the past two years, imposing underwriting discipline over long cycles, while redeploying available capital. It’s a strategy that has resulted in higher profitability in 2021 and 2022.

Challenges faced by the reinsurance market in 2023

With rising claims, higher inflation and persistently low interest rates, reinsurers have been operating in an unfavorable environment for several years. They are also faced with new, more complex and poorly modeled risks: pandemics, cyber risks, climatic events, financial, inflationary and political risks. In this challenging environment, reinsurance companies have no choice but to adapt. They have to strike the right balance between limited capacity and strong demand from their customers.

Decline in reinsurance capacity

In 2022, for the first time in ten years, the reinsurance market was faced with a decline in the volume of capital invested which has dropped from $571 billion in 2021 to $530 billion in 2022, a decline of seven per cent. This decrease comes at a time when major rate adjustments have been implemented over the past two years, with increases of 30 per cent to 40 per cent on certain risk categories. The increase in rates has not, however, led to the injection of additional capital into the market as the main players have simply resorted to reducing their exposure to certain risks and geographical areas. More cautious underwriting strategies were then put in place for the 2022 and 2023 renewals, with the main aim of limiting catastrophic commitments. This pricing catch-up was also coupled with a tightening of contract renewal conditions. AXA’s subsidiary AXA XL, for example, reported a 6.3 per cent rate increase for the first half of 2023, while Swiss Re raised property-casualty prices by 21 per cent at the July renewals this year. “In 2022, this pressure on available capital was mainly due to: catastrophic events that have dried up market capacity,the average annual increase in natural catastrophe claims.

Insured losses now exceed $120 billion per year, rising property values and inflation,strong demand for coverage from insurers,the volatility and poor performance of reinsurers in recent years,risk reduction in certain portfolios,investment losses linked to capital appreciation in traditional reinsurance, increased stock market volatility,” the report said. According to industry professionals, excess reinsurance capacity has lasted for several years. In fact, the decline in capacity offered in 2022 has not compromised the market, which still has the necessary funds to meet its commitments. Another factor in the recovery is that reinsurers have become more disciplined, remaining cautious as to their way of deploying their capacity. For 2023, AM Best is forecasting that losses incurred prior to 2022 will be recouped, resulting in an increase in operating results and the generation of new capital. It is, therefore, up to insurers to position themselves better and absorb frequent losses, so that reinsurers can refocus on their primary role of supporting primary players in the face of major catastrophes. All in all, the rating agency is predicting a 5.6 per cent increase in reinsurance supply in 2023.

Climatic losses rose in 2022

In terms of economic losses, 2022 stands for the fifth most expensive year in the last two decades. In addition to that, and with 125 billion in insured losses, 2022 is found to be the fourth most impacted year, after 2017 (Hurricanes Harvey, Irma and Maria), 2011 (Japan Earthquake) and 2005 (Hurricane Katrina). The most significant events that occurred in 2022 were: Hurricane Ian, which lashed Florida in September. It was the most costly event of the year, with insured losses estimated at between $50 billion and $65 billion, storm Eunice, which hit north-western Europe,winter storms in the United States,the Fukushima earthquake in Japan,the deadly floods in Australia,the equally deadly floods in South Africa in April and May, record drought in Europe, China and the Americas,the mega forest fires that ravaged Canada and several Mediterranean countries between May and September.

2003-2022 review

Over the past 20 years, insured losses have risen by an annual average of 8,47 per cent, an increase due not only to climate change, but also to higher risk exposure, higher insured property values and inflation. After peaking at $154 billion in 2017, insured damage losses have risen significantly again in the last two years, to $111 billion and $125 billion in 2021 and 2022 respectively. The $100 billion threshold for insured losses should be reached and exceeded in 2023. As natural catastrophes have continued to gather momentum, a large number of insurers and reinsurers resorted to readjusting their underwriting policies for 2023. This is particularly the case in the US and Australian markets, with some players in these markets having decided to drastically reduce their capacity, while others preferred to stop underwriting natural catastrophes.

High exposure to primary and secondary hazards

In recent years, the reinsurance market has been heavily affected by the high intensity of large-scale primary hazards, such as hurricanes and earthquakes. Secondary perils, meaning those of medium intensity, are also feared by the industry due to their high frequency. Losses such as hail, floods and forest fires account for an ever-increasing share of the damage covered by insurers. In the long term, such primary and secondary catastrophes dry up or severely restrict capacity. Faced with this situation, reinsurers have no choice but to: impose higher retentions,tighten contractual conditions,exclude certain hazards. Against the backdrop of climate change, the issue pertaining to the insurability of such risks is more important than ever.

Inflationary trends

Faced with rising risk capital and soaring costs of repairing and rebuilding damaged property, reinsurers are concerned about inflation as they are required to: reassess their risk exposure, anticipate the impact of inflation on their reserves, increase rates in line with inflation to avoid losses and cash flow difficulties.US insurers withdraw from certain risks. .

Renewals

Reinsurers are entering the renewals in better shape than in recent years, which were plagued by the Covid-19. The improvement in market results, confirmed by the rating agencies, is in line with the actions taken by reinsurers at the time of the 2023 renewal: rate increases, tougher treaty conditions and the development of alternative solutions. The decline in natural catastrophe claims in the United States in 2023 also points to a return to a better balance between reinsurance supply and demand. According to the rating agencies, the positive trend in the market, with reinsurance supply and demand better balanced than in the past, is underpinned by the absence of major catastrophic events. The only major loss of the year 2023 pertains to the earthquake in Turkey, which has so far been valued at 6 billion USD, a far cry from the sums usually paid out by reinsurers for the cyclones that periodically devastate the coasts of South America. The capacity available in 2024 for property damage insurance, including natural disasters, should be sufficient. Catastrophic events, which are heavily penalizing the market, will continue to require special attention from reinsurers, with possible rate adjustments and tighter underwriting conditions. This firmness exhibited by reinsurers will lead to a better risk-sharing between the various market players. Reinsurance: the 2024 renewal as perceived by rating agencies Rating agencies are once again commending the resilience of the reinsurance market, its resistance to extreme events and its profitability. The assessments of the various agencies hardly vary from one another, although there are a few nuances that can be summarized as follows:

Standard & Poor’s

S&P has revised its outlook for the market from negative to stable. The agency justifies its decision by pointing to a recovery in earnings following rate increases in 2023, higher interest rates and increased investment income. However, S&P is forecasting less pronounced rate increases than those implemented in 2023. These increases are motivated by the possible resumption of natural catastrophe claims after the lull in 2023.

AM Best

Despite the decline in capacity observed since 2022, AM Best is not expecting excessive pressure on the balance sheets of the main reinsurers in 2024. In the agency’s view, the reinforcement measures taken by reinsurers during the 2023 renewals have enabled them to realign their risk profiles, putting them in a strong position to generate underwriting profits. Again according to the agency, the results exhibited in the first half of 2023 are better than those reported at the same time during the two previous renewals. Despite this encouraging data, the agency still does not expect a significant influx of additional capital or the arrival of new players on the market in 2024. This latest observation by AM Best is inconsistent with the trend of previous reinsurance cycles, which have seen new capital arrive after each exceptional catastrophe. This was particularly true after the events of September 2001, the occurrence of Hurricane Katrina in 2005 and Hurricanes Harvey, Irma and Maria in 2017. However, such a process of capacity creation was not repeated in 2020- 2022 after the Covid-19 pandemic. Contrary to past experience, instead of reporting an influx of capital as the 2020- 2022 crisis drew to a close, some reinsurers deserted high-risk regions such as Florida and California.

Fitch Ratings

Fitch Ratings has revised its outlook for reinsurance upwards from neutral to positive. The agency justifies this change by: the strengthening of the sector’s financial performance which are poised to continue in 2024,renewed interest from institutional investors in anticipation of higher returns,strong capitalization with the inflow of alternative capital. After the last two years of poor results, linked to poorly modeled risks, the impact of climate change and high inflation, the agency is forecasting stricter underwriting conditions for 2024, with further rate increases in property damage classes of business. These increases should, however, be more moderate than those reported in 2023. Finally, Fitch Ratings anticipates the market’s combined ratio to be set at 94 per cent for 2023.

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