Moody’s sees inflationary push-back to hard market reinsurance margins

The hard P&C reinsurance market should give a boost to margins for the big four European reinsurers -  Munich Re,  Swiss Re,  Hannover Re and  SCOR - but the unknowns of inflation could yet undermine management hopes to carve several points off of loss ratios, analysts at  Moody’s have said.

"We expect strong nominal price increases and improved underwriting quality to strengthen the reinsurers' P&C reinsurance claims ratios (claims as a percentage of premiums) in the months ahead, although the effect will be partly offset by rising loss costs," analysts wrote in research summarising 2022 performance.

Some of the price gain is already on the books. January 2023 treaty renewals were said to bring the "strongest price increases in decades" although premium growth remained "relatively moderate" as reinsurers managed exposures with a continued eye to accumulation risks via catastrophic events.

“Inflation and recurring catastrophe losses remain the key risk factors to the margin outlook,” Moody’s warned. Management at the Big Four is said to seek on average 2-3 points of improvement in loss ratios “although the sudden rise in claims inflation in 2022 illustrates expected margin improvements can fail to materialise.”

"The impact of higher prices on underwriting profitability will depend on how claims inflation evolves in shorter-tail lines, and on whether it spreads to other lines of business," analysts wrote.

Inflation has not only made itself abundantly clear in current loss ratios in 2022, but has additionally gone to reserve adjustments. Hannover Re will be rebuilding some lost reserve redundancy in 2023, Munich Re made Q4 adjustments, Swiss Re made adjustments to the tune of 1.8 points to its loss ratio and SCOR did a massive 6.2 points worth of work.

After taking it on the shins in 2022 in investment results as interest rates skyrocketed, the industry at least has the liquidity to remain safe from the likelihood of ever having to realize any of those marked-to-market losses, Moody’s said. Total net unrealised losses of €17.1 billion in 2022 proved a shock after unrealised gains of €10.1 billion the year prior.

The Big Four have the liquidity to withstand most any claims scenario, most of which carry a notable lag from event to payout. "We therefore believe that only an extreme tail scenario could force reinsurers to sell invested assets."

"With forced sales unlikely, we believe most of these unrealised losses will reverse over time as the bonds approach maturity."

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