Property Cat Reinsurance Rates Likely to Rise by More Than 10% in January Renewals

Reinsurance rates for property catastrophe business should increase by well over 10% when contracts are renewed in January 2023, according to a commentary from Fitch Ratings

Fitch expects double-digit percentage premium rate rises for property catastrophe cover in 2023, driven by insured losses of about US$120 billion in 2022 and the increasing frequency and severity of natural catastrophe claims. (Typically, two-thirds of non-facultative reinsurance business is renewed in January, with a regional focus on Europe.)

Price rises will be most pronounced in the regions worst affected by natural catastrophe events in 2022, including Australia, Florida and France, Fitch said, noting that Hurricane Ian was one of the costliest natural catastrophes on record, with insurance claims ranging from an estimated US$35 billion to US$55 billion.

Property-cat premium increases will support underwriting margins against rising claims due to high inflation and climate change, Fitch said.

Capacity Pressures

Fitch expects reinsurance capacity for property catastrophes risks to be pressured in 2023, with selective capital inflows from existing or new risk carriers more than offset by partial or total withdrawals by other reinsurance providers.

Further, limited retrocession capacity will put additional upward pressure on property cat premium rates, the commentary continued. Fitch also expects tighter terms and conditions in 2023, including a movement to named perils coverage from all perils, higher insurer retentions and reduced limits provided.

“Nevertheless, we believe demand for property catastrophe reinsurance during the 2023 renewals season will be broadly met, except for Florida,” Fitch added.

“We expect significant premium rate increases for specialty lines of business, such as marine and aviation, that have been most affected by the war in Ukraine. Motor hull premium rates will also increase in response to high spare-parts price inflation, but increases for liability lines should be more muted as more reinsurance capacity will be directed to this part of the market,” Fitch said.

“Claims inflation has yet to be pushed up by social inflation or general inflation, but we expect this to change in 2023, with negative implications for underwriting margins and reserves. Underestimating claims inflation for liability lines is one of the most significant risks for reinsurers.”

Fitch now expects the reinsurance sector’s calendar-year combined ratio to improve by about 4 percentage points in 2023, assuming a more normal level of natural catastrophe losses and given the withdrawal of cover related to the war in Ukraine. However, Fitch predicted that underwriting margins, excluding natural catastrophe and war-related losses, are likely to only marginally improve.

Fitch forecasts broadly stable underlying profitability for the global reinsurance sector in 2023, and is maintaining its neutral fundamental sector outlook.

Investment Income

The steep rise in interest rates in 2022 has led to write-downs on large parts of reinsurers’ investment portfolios, which has caused accounting capital to shrink significantly due to the accounting mismatch between assets and liabilities, Fitch said. “However, the impact on economic and regulatory capital has been neutral to positive, and we do not consider the industry’s capitalisation to have suffered. The write-downs have also depressed investment income, leading to lower reported earnings for 2022, but rising reinvestment yields should gradually boost investment income over time.”

Source: Fitch