Reinsurance rates should advance into 2022 on host of cost-side drivers and strong carrier demand

Reinsurance rates should continue to advance globally on a slew of unrelenting loss cost drivers plus rising demand from primary carriers seeking earnings stability, analysts at AM Best said in a sector report.

"AM Best expects pricing to improve for most business lines at the upcoming January 1 renewals and into 2022, albeit likely at a slower pace than in the past few years," analysts wrote. Alternative capital "continues to mute pricing gains" in certain layers of catastrophe lines.

"Enhanced underwriting discipline, coupled with substantial cumulative rate increases, has improved underwriting opportunities for almost all reinsurers," analysts wrote.

AM Best puts the continued price gains primarily to "rising loss cost inflation, natural catastrophe activity and historically low investment returns."

The cost side of that equation is broad-based: heightened nat cat losses in what could be lasting climate-driven trends, social inflation, and garden-variety economic inflation are all plentiful in the mix, analysts warned.

2021 nat cat losses, the latest in a string of over-budget nat cat years, "should keep the industry focused on the need to push for more rate increases," analysts wrote.

Social inflation might not only be rising, but spreading as well, from its origins in casualty lines to property. "Some of the same issues affecting liability coverages may be creeping into the property lines," most visibly in post-catastrophe claims settlements, analysts wrote.

Economic inflation has added much more than its two cents, "for the first time in a number of years," in part as the economic recovery puts supply chain interruptions and labour shortages to bear right on insured replacement costs.

While views remain split on the durability of inflation, "underwriters will at least need to account for the very real possibility of higher economic inflation," AM Best analysts wrote.

Beyond costs, a declining contribution from reserve releases and lingering fragilities in the economic recovery could add to bean counter fears over profits and growth capacity, analysts warned.

But many of those same factors appear to be driving up demand for reinsurance capacity, AM Best added. Demand appears healthy among primary carriers seeking to stabilise earnings and capital efficiency.

"The increase in demand for reinsurance capacity has allowed smaller reinsurers a greater role than they have had in recent memory," analysts wrote.