Price hikes and higher investment income will boost earnings

Reinsurance earnings will benefit from rising prices and gradually higher investment income amid rising interest rates, according to Moody’s Investors Service in a pre-Monte Carlo briefing.

Moody’s is maintaining its stable outlook for the sector.

The majority of reinsurance buyers surveyed by Moody’s foresee an increase in prices, with 40 percent expecting price rises of more than 7.5 percent in property lines. Moody’s said that this was the third consecutive survey where respondents expected no overall price decline in P&C reinsurance.

The rating agency said that recent catastrophe losses and an increased perception of risk following the pandemic have fuelled strong demand for both primary commercial and reinsurance P&C protection.

However, it added that these losses and climate change concerns have prompted a sector-wide reassessment of catastrophe risk, with many reinsurers beginning to pull back capacity.

Helena Kingsley-Tomkins, a vice president at Moody’s, said that reinsurers’ earnings had been deteriorating for more than a decade and over the last five years became weak and volatile as a result of COVID-19 and catastrophe claims.

The survey also identified inflation as a key threat. Rising material and labour costs, exacerbated by the impact of post-pandemic supply chain disruption, are already holding back earnings improvements in home, commercial property and motor re/insurance lines. Sustained high inflation could also increase long-term care and medical costs, elevating claims and reserving risk in long-tail liability lines.

Kingsley-Tompkins told Monte Carlo Today that Moody’s expects ongoing price increases together with rising interest rates to continue to support better underwriting and earnings for the reinsurance sector.

“Clearly the sector faces a number of challenges,” she warned. “A continued focus point will be catastrophe exposures, linked to the broader climate change theme, while we’re seeing a growing divergence in terms of reinsurance appetite.

“The bottom line is that, as a sector, exposures remain high and reinsurers remain vulnerable to outsized natural catastrophe losses and the risk of earnings volatility is only further amplified by the high inflationary environment which we see as the key risk for the P&C sector more generally.”

She added that it is still too early to say what the size and scale of the reinsurance losses, primarily in the aviation sector, will be from the Ukraine-Russia war. But, she added, due to the likely highly litigious nature of the claims, with planes being seized by the Russian government, settlements could vary in size.

“Even if we look at the maximum potential loss based on the value of the underlying aircraft, we think it’s roughly $10 billion, so clearly that’s materially higher than from the reserves that have been booked,” said Kingsley-Tompkins.

“But that is manageable for the reinsurance sector—it’s equivalent to a mid-sized natural catastrophe loss, so clearly well within sort of the ability of the sector to manage.”

Moody’s notes that cyber risks and demand for cyber protection are rapidly expanding, accelerated by the pandemic, and cyber insurance has become a must-have for businesses as part of their risk management. As a result, Moody’s views this as a growth opportunity for P&C re/insurers.