Moody’s: 1.1 rate acceleration will focus on property reinsurance

Monte Carlo attendees were “universally upbeat” on property reinsurance pricing trends, according to a new report from Moody’s, with some European reinsurers stating market conditions have “never been more positive”.

In a report outlining the key takeaways from last week’s Rendez-Vous de Septembre (RVS), the rating agency said it expected the upcoming 1 January renewals to see continued price increases in property catastrophe, driven by inflationary concerns, increasing weather-related losses and a decline in property reinsurance capacity as some players pull back from the market.

With reinsurers expressing confidence that continued price increases will bolster their performance in the coming year, Moody’s said this consensus is consistent with its stable outlook for the global reinsurance sector in 2023.

“[Reinsurers] cited concerns about inflation, a decline in total property reinsurance capacity as some players retreat from market, and continued strong demand from primary insurers because of rising weather-related losses as the key drivers.”

Moody’s added that some reinsurers have recently reduced their property cat exposure in response to the rise in claims – especially from secondary perils, which accounted for ~60 percent of total cat claims over the past three years.

Further deterrents to remaining in the space include doubts over whether cat models can accurately capture climate change trends, as well as the high cost of property cat retrocession, Moody’s said.

While RVS attendees recognised that high inflation is pushing up property claims costs for (re)insurers, Moody’s said they remain confident that price increases will be sufficient to offset this in 2023.

This will also be supported by underwriting performance, structural changes to reinsurance portfolios and programs, and higher attachment points to move to more remote layers, the report noted.

Casualty reinsurance pricing is expected to see more subdued growth relative to property, predominantly driven by inflation-driven claims increases and the US phenomenon of social inflation as courts open up post-Covid.

Moody’s added that some reinsurers that have retreated from the property cat market are now redeploying capital into casualty business, therefore increasing total capacity.

This has caused prices to slow or even decline in some primary casualty markets, such as US workers’ compensation.

Moody’s said it expects casualty reinsurers to achieve low-to-mid single-digit price rises over the next year.

Reinsurance capital remains strong

Reinsurers reported a significant reduction in their shareholders’ equity for the first half of 2022, which Moody’s said was a result of unrealised investment losses as rising interest rates reduced the value of fixed income securities.

However, reinsurance capital remains abundant when measured by regulatory ratios, which benefit from higher interest rates.

Therefore, Moody’s said the global reinsurance sector remains in a strong position to absorb potential underwriting, macro or financial market shocks.

RVS attendees upheld this view that reinsurers’ overall capital position is solid, supported by the sector’s good asset-liability duration and strong liquidity.

In terms of alternative reinsurance capital, Moody’s said it does not anticipate rapid growth despite the alternative capital base having tripled to just under $100bn (around 15 percent of total reinsurance capital) in the past 15 years.

The report added that the alternative capital market’s expansion is “poised to resume, albeit at a slower pace” as high property cat reinsurance prices bolster investor returns.

Economic and social inflation as earnings risks

RVS attendees highlighted that price inflation is increasing claims expenses, and Moody’s acknowledged this as a significant threat to earnings in its sector outlook, noting that so far price inflation has mainly affected claims in short-tail property and motor lines.

However, prolonged high inflation will likely increase both wages and the cost of medical and long-term care, leading to higher casualty claims, the rating agency warned.

With social inflation exacerbating uncertainty around reserve adequacy, Moody’s noted that reinsurers may also need to add to reserves against past casualty claims that have not yet been settled.

The Insurer comment

Moody’s analysis is consistent with our key takeaways from this year’s Rendez-Vous, particularly around the need for inflation to be fully priced for in this year’s renewals.

As we have noted, cat/all-risk treaty brokers are going to be working overtime in Q4 to complete their clients’ programs at 1.1…