A combination of higher prices and tighter policy terms, supported by favourable risk/return dynamics and healthy investment income, are among the key drivers supporting the global reinsurance industry, as Moody’s outlook for the sector has been revised to positive.
In a new Moody’s report, analysts highlighted that property reinsurers have raised the loss thresholds where reinsurance cover is triggered, and reduced their exposure to high frequency, low-to-medium severity natural catastrophes such as severe convective storms (SCS).
However, as analysts pointed out, with only limited new capital entering the market, this will ultimately drive continued strong profitability over the next year, assuming no large catastrophes take place.
Moody’s explained that reinsurance prices remain high, while policy terms and conditions remain tight, which is helped by an upward reassessment of risk that supports good risk/return dynamics.
“We expect strong prices, favorable policy terms and higher investment yields to support strong profitability for the reinsurance sector over the outlook period, assuming no major catastrophes. Over the last five years, reinsurers’ underwriting profitability has steadily improved as rising claims have prompted them to raise their prices and reduce their underwriting risk, while higher interest rates have boosted their investment income,” explained Moody’s.
It also appears that balance sheets remain in good shape, as analysts stated that reinsurers are mostly well capitalised and have only moderate asset risk, which limits their exposure to financial market volatility.
Moody’s also noted that capital inflows in response to current high reinsurance prices have been relatively modest, and have mostly been directed towards catastrophe bonds.
As well as this, casualty reinsurance prices have strengthened in response to persistently high claims, although they have not risen uniformly across all classes, however, in the United States, they have seen steady improvement, with a cumulative increase of around 80% since early 2016.
Claims are still reportedly rising at a faster pace than prices within some casualty segments and underwriting years. Major reinsurance organisations are said to be putting pressure on primary customers to reduce their exposure to higher risk areas, notably where reinsurers have moved to proportional coverage to benefit from price increases on the primary side.
Moody’s also highlighted that extreme weather remains a major concern, however it could wind up supporting prices.
“The frequency and severity of catastrophe events over the coming year and their impact on reinsurers’ profits will have a significant bearing on the sector’s ability to push for further price increases in 2024 and beyond. If catastrophe activity is light over the next 12-18 months, reinsurers may not be able to keep prices at current high levels,” Moody’s explained.
