Nat cat & inflation may yet out under-reserved reinsurers: Moody’s

Runaway inflation might yet draw back the curtain on any reinsurers who have played too loose with P&C loss reserves, an effect that could prove painful if have natural catastrophe joins the picture in 2022, analysts at  Moody's have warned.

While insurance rate hikes have been effectively leveraged to protect current year underwriting profits from the surge in inflation, prior-year events might now be comparatively naked on the balance sheet.

"Reserving adequacy for prior year claims is in our view less certain, as the recent jump in inflation might not be reflected in current reserving levels," Moody's analysts wrote.

"Even in short-tail property lines, where there is greater visibility over future claims than in longer-tail business, loss cost trends suggest claims inflation is running at levels in excess of initial best-estimate reserving assumptions."

And social inflation - shut down during the pandemic era as courts closed - has yet to have its renewed say in the matter, Moody's warned.

"Based on what we perceive as broad-based inflationary trends, we believe there is a risk that upcoming reserve reviews will result in reserve strengthening," analysts wrote.

Any notable wallop from natural catastrophe could exacerbate the effect to the bottom line.  

Above-average nat cat claims have already dampened H1 P&C reinsurance earnings and made the full-year nat cat budgets seem tight, given the historic tilt towards catastrophic damages in the second half.

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