Rate hardening in (re)insurance expected to continue through 2022
Source: Middle East Insurance Review | Jul 2021
Insurance and reinsurance rate hardening is set to continue through next year, according to a recently-released Swiss Re report.
Rates have been hardening since 2018 and price momentum picked up at this year’s January renewals, said the report. The current market is characterised by tighter capacity, mostly due to reduced risk appetite on the part of re/insurers, rather than a shortage of capital. Last year’s capital losses were temporary as asset valuations recovered quickly from the lows of March 2020.
The report added that the reduction in re/insurers’ risk appetite is driven by modelling uncertainty in an environment of ambiguity about macro developments and volatile capital markets. Elevated modelling uncertainty arises from multiple factors including social inflation, which has pushed up US liability claims; prior-year adverse reserves development; uncertainty around COVID-19 business interruption losses; successive years of above-average CAT losses; continued uptick in secondary peril losses; and increased scrutiny of the modelling of climate change impacts.
The impact of low investment returns on re/insurer earnings is a further factor pushing up re/insurance rates. Even after rises in the first quarter this year, interest rates and consequently investment returns remain low by historic standards. This places more focus on underwriting profitability to make up for the lost investment income in order to compensate investors for their cost of capital.
The reinsurance capacity provided by third-party capital is an important contributor to property CAT lines of business. A reduction in capacity in collateralised reinsurance, which has suffered poor returns in recent years, is contributing to selective tightening in the retrocession market and is also a factor in rate hardening in the reinsurance market. The report concluded that rate increases in 2022 would further increase the profitability of new business. M