Reinsurance Rates for Catastrophe Property Expected to Rise by 10%: Fitch

Reinsurance rates for property catastrophe business should rise by more than 10% when contracts are renewed in January 2023.

Source: WSJ | Published on November 29, 2022

January 1 reinsurance renewals

According to Fitch Ratings, reinsurance rates for property catastrophe business should rise by more than 10% when contracts are renewed in January 2023, bolstering underwriting margins against rising claims due to high inflation and climate change. In January, two-thirds of non-facultative reinsurance business is typically renewed, with a regional focus on Europe.

Rising prices and higher reinvestment yields will help to mitigate the effects of rising claims inflation and declining asset values. As a result, Fitch maintains its neutral fundamental sector outlook and forecasts broadly stable underlying profitability for the global reinsurance sector in 2023.

We anticipate double-digit percentage premium rate increases for property catastrophe coverage in 2023, owing to insured losses of approximately USD120 billion in 2022 and the increasing frequency and severity of natural disaster claims. Price increases will be most pronounced in the areas most affected by natural disasters in 2022, such as Australia, Florida, and France. Hurricane Ian is expected to have cost between USD35 billion and USD55 billion in insured claims, making it one of the most expensive natural disaster events in history.

Fitch anticipates that reinsurance capacity for property catastrophe risks will be squeezed in 2023, with selective capital inflows from existing or new risk carriers more than offset by partial or total withdrawals from other reinsurance providers. Furthermore, limited retrocession capacity will push property cat premium rates even higher. Fitch also anticipates tighter terms and conditions in 2023, including a shift to named perils coverage from all perils, higher insurer retentions, and lower provided limits.

Nonetheless, we believe that demand for property catastrophe reinsurance will be broadly met during the 2023 renewals season, with the exception of Florida.

We anticipate significant premium rate increases for specialty lines of business, such as marine and aviation, which have been disproportionately affected by the Ukrainian conflict. Premium rates for motor hulls will rise in response to high spare-parts price inflation, but increases for liability lines should be more muted as more reinsurance capacity is directed to this segment of the market. We do not expect claims inflation to be pushed up by social or general inflation until 2023, which will have a negative impact on underwriting margins and reserves. One of the most significant risks for reinsurers is underestimating claims inflation for liability lines.

Fitch has revised its global reinsurance forecasts and now expects the calendar-year combined ratio to improve by about 4 percentage points in 2023, assuming a more normal level of natural catastrophe losses and taking into account the withdrawal of cover related to the Ukraine war. However, underwriting margins excluding natural disaster and war-related losses are only likely to improve marginally.

The sharp increase in interest rates in 2022 has resulted in write-downs on significant portions of reinsurers’ investment portfolios. As a result of the accounting mismatch between assets and liabilities, accounting capital has shrunk significantly. The impact on economic and regulatory capital, on the other hand, has been neutral to positive, and we do not believe the industry’s capitalization has suffered. The write-downs have also reduced investment income, resulting in lower reported earnings for 2022; however, rising reinvestment yields should gradually increase investment income over time.