Rating agency predicts double-digit rate rises for property catastrophe cover driven by insured losses of c.$120 billion

Reinsurance capacity for property catastrophes risks will remain 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.

Furthermore, limited retrocession capacity will put additional upward pressure on property cat premium rates. Tighter terms and conditions in 2023 are also expected, including a movement to named perils coverage from all perils, higher insurer retentions and reduced limits provided.

Nevertheless, Fitch believes demand for property catastrophe reinsurance during the 2023 renewals season will be broadly met, except for Florida.

Market to harden

Reinsurance rates for property catastrophe business should increase by well over 10% when contracts are renewed in January 2023, Fitch Ratings says, supporting underwriting margins against rising claims due to high inflation and climate change.

Typically, two-thirds of non-facultative reinsurance business is renewed in January, with a regional focus on Europe.

Increasing prices and higher reinvestment yields will help to offset the effects of rising claims inflation and lower asset values. The rating agency forecasts broadly stable underlying profitability for the global reinsurance sector in 2023, and is maintaining its neutral fundamental sector outlook.

It expects double-digit percentage premium rate rises for property catastrophe cover in 2023 driven by insured losses of about $120 billion in 2022 and the increasing frequency and severity of natural catastrophe claims.

Price rises will be most pronounced in the regions worst affected by natural catastrophe events in 2022, including Australia, Florida and France.

Hurricane Ian is likely to have caused between $35 billion and $55 billion of insured claims, making it one of the costliest natural catastrophe events ever.

Specialty classes under pressure

Fitch expects 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.

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 has updated its global reinsurance forecasts and now expects the calendar-year combined ratio to improve by about 4pp in 2023, assuming a more normal level of natural catastrophe losses and given the withdrawal of cover related to the war in Ukraine.

However, underwriting margins excluding natural catastrophe and war-related losses are likely to only marginally improve.

The steep rise in interest rates in 2022 has led to write-downs on large parts of reinsurers’ investment portfolios. This has caused accounting capital to shrink significantly due to the accounting mismatch between assets and liabilities.

However, the impact on economic and regulatory capital has been neutral to positive, and it does 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.