Reinsurers have industry’s pole position on pricing — but beware of inflation ‘wild card’

Reinsurers are taking the industry’s top price momentum into 2022 and results of the January renewals may have shown an industry positioning itself well for better risk-adjusted pricing and improved profitability in 2022, a key official from  Fitch Ratings indicated.

Inflation, where the current spike to hold beyond expectation, is a chief threat for unwinding those gains, Fitch warned in a separate report.

“We think there is a bit more momentum in pricing [in reinsurance] and a bit more room for improving performance in 2022,” James Auden (pictured), Fitch’s managing director for North American non-life insurance, told a webinar late Tuesday.

That thought helped earn the reinsurance sub-sector an improving outlook from Fitch analysts, above the neutral outlook for primary property/casualty (P&C).

“The distinction is that reinsurance has kind of lagged in terms of performance and the pricing cycle” and was “definitely hit harder by the pandemic and by recent catastrophe, maybe more than primary,” Auden said to justify the call on superior momentum.

Signals from the January renewal season anchor Fitch in the view.

Fitch sounds rather calmed by reports that the January renewal season may have proven highly differentiated between segments as much of the industry herded into safer segments to depress those rates while eschewing some loss hit segments to let those rates fly high.

“There are always relative differences in underwriting prowess,” Auden told Intelligent Insurer. “The improving sector outlook is tied to expectations for improved performance in 2022, which consider market changes in pricing, risk selection and portfolio structuring by reinsurers in response to recent experience.”

Any January laggards in premium growth or rate increases “may have better performance improvement versus peers” on assumption of risk reduction towards better risk adjusted pricing, Auden told Intelligent Insurer.

One way or the other, the capital appears to be lined up for whatever growth the industry picks.

"From an industry perspective, reinsurance capital continues to expand, with substantial global capacity to withstand insured large loss events as evidenced by resiliency demonstrated with recent years cat experience," Auden said. "For our rated universe, capital levels and adequacy continue to be supportive of individual ratings."

Inflation is the wild card, Fitch said in a separate report out late Tuesday. Were CPI to hold above expectations for two years, “reinsurers’ credit profiles could weaken – despite a series of defence mechanisms at their disposal,” Fitch analysts Robert Mazzuoli and Brian Schneider wrote. Long-tail casualty lines were called out for the potential knock-on effect on claims inflation.

Reinsurers can respond to durable inflation by tinkering with inflation bases in terms and conditions or by adjusting investment strategy to counter, but most strategies “have their limitations,” authors warned.

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