Inflation, nat cat, war and COVID add up to acute renewal

The impact of COVID-19 is still being felt by the reinsurance market, but it’s just one of a web of factors that are influencing rates and profitability – including inflation, war and natural catastrophes.

Speaking to Intelligent Insurer David Flandro, head of analytics for Howden Broking, emphasised the combined impact of all these elements.

“It looks like we've come to the top of the logarithmic curve in terms of COVID losses,” he said. “The losses are still developing, but currently, COVID losses are settling somewhere around $50 billion.

“COVID as an epidemiological/business interruption event had a much bigger effect in 2021. What's really affecting us in 2022 is coming out of COVID, the consequences of COVID policies, and the confluence with everything else that is happening.”

In Flandro’s view, the market is now experiencing a confluence of grey swans.

“They’re not black swans, because we knew we could have inflation, we knew we could have a hurricane, we knew that bond prices could go down, and we've had wars before. But it's the confluence of all of this that's having a couple of effects. Number one is that as interest rates go up and as bond prices fall, property and casualty insurers and reinsurers are some of the largest holders of high grade and medium duration fixed income securities, so that impairs balance sheets.”

At the end of the first half of the year, dedicated reinsurance capital fell by 11 percent – a fall the likes of which had not been seen since the financial crisis.

“The third quarter numbers are looking worse for balance sheets,” said Flandro. “We don't know what will happen by the end of the year, but it seems entirely likely that by then, the global reinsurance sector will for the first time since 2008 possibly have more premiums than dedicated capital - so the premiums to surplus ratio will go above 100 percent. That's really significant, because it means that the sector is bearing more risk than capital. This hasn’t happened since 2008.”

This is just one of the factors that's driving rates higher. Another factor is inflation, which Flandro says hit primary market first, before impacting the reinsurance market.

War in Ukraine exacerbates factors such as inflation and asset side problems - and on top of this comes the additional impact of hurricane. Catastrophe losses are rising at a much sharper trajectory than man made losses.

“We have to get used to the fact that insured catastrophe losses are getting bigger, certainly in nominal terms, and pretty obviously, in real terms,” said Flandro.

“It looks like we could have one of the largest insured catastrophe loss years on record – possibly the fourth largest insured loss year in real terms,” he added. “That's happening in an environment where balance sheets are slightly impaired, where interest rates have gone up, and inflation has gone up. It’s all happening at the same time, and the result is the most acute renewal that we've had since 2005, 2006.”