Increasing catastrophes fuel fresh demand for reinsurance in hardening market

Analysts expect reinsurers’ financial performances to "significantly improve" due to higher prices in a hardening market, a strong rebound in global economic activity and lower pandemic-related losses. According to  Moody's, these positive factors should outweigh the negative effects of declining investment returns, increasing natural catastrophe claims due to climate change, and a temporary pick-up in inflation.

Moody’s has revised the outlook for the reinsurance sector to stable, a year after it was downgraded to “negative” in the midst of the pandemic.

“The stable outlook reflects our expectation that reinsurance price increases amid a global economic rebound will support reinsurers’ earnings and that the sector’s capitalisation will remain healthy, underpinning its credit strength,” the agency explained in its latest report.

The economic recovery is fueling demand for primary insurance, particularly commercial insurance, it noted, pushing up reinsurance requirements. Meanwhile, property reinsurance rises were supported by natural catastrophe losses and a re-evaluation of secondary perils, such as wildfires.

“Casualty prices remain strong because of higher demand, rising loss costs, and low investment yields,” it added.

On the liability side, Covid claims uncertainty was diminishing, it said, although it noted that “the pandemic continues to weigh on some large multiline reinsurers’ earnings in 2021, reflecting higher than expected mortality claims”.

Low interest rates were also reducing reinsurers’ return on capital.

However, alternative capital has returned to growth in 2021, and traditional reinsurers with strong third-party capital management platforms would be well-positioned to take advantage of new opportunities, it said.

“For reinsurers, such platforms generate fee income while allowing them to underwrite risks and increase their market share at a lower capital cost.”

Overall, it was an optimistic outlook.

Helena Kingsley-Tomkins, VP-senior analyst at Moody’s, said: “Healthy price increases will drive stronger earnings through 2022 as the post-pandemic economic recovery and recent significant catastrophe losses fuel fresh demand for reinsurance.

“The sector’s capitalisation remains solid, with solvency ratios resilient in a range of stress scenarios.”

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