Inflation woes and war: reinsurance & London market faces grim outlook

Increased risks from rising claims inflation, financial market volatility and weakening price momentum, coupled with the negative macro-economic implications of the war in Ukraine, have massively dampened the growth outlook for the global reinsurance and London market sector.

The sector’s outlook has been lowered to “neutral” from “improving” by  Fitch as the ratings agency no longer expects the financial performance of companies to improve significantly in the current market environment.

“Increased financial market volatility has led to higher regulatory capital requirements and – in some cases – to investment losses due to wider credit spreads and lower equity valuations,”  Fitch said. “Pressure on economic growth could dampen demand for insurance and reinsurance cover,” it warned.

Rising inflation, which was already pushing up claims costs, has accelerated, the agency said, noting that it will be “very difficult” for companies to achieve above-inflation premium increases, which has started to slow down.

Fitch deems the Russia-Ukraine war as a “mid-sized catastrophe event” for the global reinsurance and London market sector, mostly affecting specialty lines such as aviation, marine, political risk, trade credit and cyber insurance.

The agency expects re/insurers to suffer a hit to earnings, rather than capital depletion. But, noted that there is still the potential for the frequency and severity of natural catastrophe losses to remain higher and reduce market profitability.

The agency’s latest research shows that short-tail business lines are already being affected by higher claims inflation, with repair costs for buildings and vehicles rising fast. “Insurers and reinsurers may be able to increase premiums accordingly, but as high inflation becomes longer-lasting, reserve deficiencies will start to arise on long-tail lines,” it said.

Claims linked to wages and healthcare costs are increasing, as are litigation costs, and  Fitch expects re/insurers to have to set aside higher provisions as a result.

Despite this, analysts are somewhat optimistic that both markets should still turn a profit in 2022, thanks to “very strong” capitalisation and underwriting discipline.

“We expect the London market’s financial performance to continue to benefit from the Lloyd’s of London performance-management actions,”  Fitch said. “Over time, higher interest rates to counter high inflation could lead to increased investment income, partially offsetting the effect of claims inflation on insurers’ and reinsurers’ overall profitability.”

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