Fitch: Strong property cat pricing will compensate for rising claims inflation

Fitch Ratings has maintained a neutral outlook on the global reinsurance sector amid predictions that the sector’s underlying financial performance will be broadly stable throughout the remainder of 2022 and into 2023.

The rating agency anticipated that the demand for most reinsurance business will be relatively unaffected by economic slowdown, with the expectation that underlying profitability will remain broadly stable in 2022 and 2023.

High macroeconomic uncertainty has led to an increased demand for reinsurance covers, Fitch said, however it said that an impending global recession may stifle demand for risk covers that are exposed to the economic cycle, such as trade credit and construction.

Fitch added that price discipline in the hardening market environment and higher reinvestment yields will largely offset the impact of rising claims inflation and falling asset values.

The outlook noted that premium rate increases had accelerated in 2022 after a slowdown during January 2022 renewals.

Property premiums increased the most in response to the effects of high inflation, higher frequency of natural catastrophes and the Russia-Ukraine conflict, Fitch said.

The rating agency added that it expects property premiums to increase further in 2023 as high inflation and the impacts of climate change continue to push up claims.

Fitch stressed it is important that pricing keeps up with rising claims inflation. It explained that capital repatriation – such as share buybacks and special dividends – will become more important over the next 18 months as more reinsurers cut back on capital-intensive property cat business.

Elsewhere, casualty premium rates are likely to remain stable as casualty business benefits from a higher reinsurance capital allocation.

Fitch added there is a potential that long-tail casualty lines could face reserve deficiencies – and in severe cases, this could weaken reinsurers’ capital.

Fitch noted the increasing importance of cat bonds in the alternative capital space, anticipating that capital inflows in this space will remain strong as peak risks are increasingly placed with institutional investors.

Fitch said the outlook remained optimistic with a projected sector combined ratio of 96 percent for 2023, although sustained high inflation and the effects of climate change make claims trends less predictable.

With risk aversion driving strong premium growth, Fitch concluded that the global reinsurance sector is positioned for strong premium growth in 2022 and 2023, with demand for reinsurance covers growing as a result of the uncertainty linked to high inflation, rising interest rates and financial market volatility.