Fitch Ratings expects reinsurance rates to increase by more than 10% in CAT-related lines of business when contracts are renewed in January 2022, which supports the improving sector outlook for 2022, said the ratings agency in a recent commentary.
Typically, two thirds of non-facultative reinsurance business is renewed in January, with a regional focus on Europe. Rising prices, prospects of a strong economic recovery and lower pandemic-related losses are key reasons for the view that the sector outlook is improving for 2022, with expectation assuming only a temporary rise in inflation.
The agency expects double-digit percentage premium rate rises for property CAT cover in 2022 due to the insured losses of around $100bn in 2021 and the prospect of natural catastrophe claims increasing in frequency and severity. Price rises should be most pronounced in Central Europe, which was hit by severe floods in July 2021, causing around EUR10bn ($11.25bn) of insured claims after several years of relatively low Nat CAT activity.
Fitch also expects lines including cyber risk and D&O liability covers to report double-digit price increases. Cyber liability has been suffering from a strong rise in claims mostly, but not exclusively, linked to ransomware attacks. Tighter terms and conditions and withdrawal of capacity add to the upward pressure on rates. D&O is confronted with a cyclical pick-up of social inflation as courts have reopened after stringent lockdown measures have expired. In addition, it expects risks to emerge from contested health and safety measures linked to the COVID-19 pandemic as well as liability risks connected to environmental, social and governance aspects.
For 2022, it is expected to be the fifth successive year of price rises, although growth is projected to be slower than in 2021 as non-loss-affected lines of business are likely to show a broadly stable price development. Attractive rates and healthy underwriting margins will continue to attract new capital, so that ample capacity will limit further price increases beyond 2022.
Nevertheless, the rate increases in 2021 and 2022 will help to bolster the sector’s underwriting profitability as these increases gradually feed into reinsurers’ underwriting margins. Higher prices are making the sector more resilient to the negative effects of climate change on Nat CAT claims patterns as well as to declining investment returns.
Fitch noted that the risk of rising inflation will remain manageable for the industry in 2022. While the future trajectory of inflation has become more uncertain recently, with strong increases in Europe and the US, the ratings agency forecasts inflation to rise only temporarily in 2021 due to the pace of the economic recovery and shortages in supply chains. It is expected to ease again in 2022 as supply responds. Recent price increases in property lines of business are sufficient to compensate for upwards pressure on claims inflation as repair costs for housing or vehicles rise, while long-tail casualty lines will only start to suffer in the event of a prolonged effect of multi-year inflation above expectations. M