Lack of capital and inflation will increase reinsurance rates

A symbol. Under the blazing sun global reinsurance meets, from September 10 to 14, in Monte-Carlo, with insurance clients to discuss prices, reinsurance capacity and risks.

After two years of absence in Monaco due to the pandemic, this “64th September Meetings” therefore marks the great return to the main round of tariff negotiations before the renewal of reinsurance contracts next January for in the year 2023. These contracts allow insurers to remove part of their risks from their balance sheets, in return for a retrocession of commissions, and to reduce their capital requirements accordingly.

Accumulation of risk and inflation

It is traditional for reinsurers to picture the worst each year in order to pass rate increases, in the range of 3% to 5% per year. But this year, it was the worst of the worst. “I have never seen such an accumulation of risks at the same time”, said Thierry Léger, head of underwriting at Swiss Re.

The health crisis has already created panic and failed risk models among reinsurers. Unfortunately, in fact, the health crisis has simultaneously burdened both branches of reinsurance, life and casualty (non-life). The reality is that risks are becoming more interdependent and increasingly global.

Added to the geopolitical tension and the more obvious consequences of climate change are the new causes of financial imbalances, with galloping inflation, a sudden increase in interest rates and strong instability- on the financial markets, not to mention the fall of the euro for European reinsurers.

However, the demand for reinsurance is there, although it continues to grow in the face of the ever-increasing frequency and intensity of claims.

Lack of capital

Reinsurers still need to have sufficient financial backing to meet this. Nothing is less certain. According to Munich Re estimates, reinsurance capital (capacity) should decrease this year for the first time since 2018 to 435 billion dollars in 2022 against 475 billion in 2021 (excluding alternative reinsurance, transferred to market through bond bonds and estimated at around 100 billion dollars). Laurent Rousseau, CEO of SCOR, even mentioned a “time of capital scarcity” after a while “mostly”.

In fact, the sharp fall in the markets has diluted the financial reserves of the reinsurers, which reduces their capacity to reinsure accordingly, and the rise in rates increases the requirements for the return of the capital employed ( but also strengthens the solvency of reinsurers and insurers) .

“Negotiations (with insurers, editor’s note) are important to focus on three points. One, the prices of course and it is not clear that a 10% increase is enough. Second, it is necessary to restructure the programs, i.e. the review of the level of risk retention of the insurance company. Finally, three, there is a lot of talk about the level of risk diversification in the same client”, trusted us, on the side of a conference, by a major local reinsurer. Clearly, insurers are not only able to insure their risks less than reinsurers, but they also have to pay more to do so. In the corridors of hotels, there is talk of price increases “double digit “, but the increases can be more or less strong depending on the risks.

Leaders seek to gain market share

Certain major risks may therefore be more difficult to “re-insure”, such as natural disasters or certain construction-related insurance. Some reinsurers, such as SCOR, have already announced that they will no longer take damage reinsurance in Florida. In 2021, natural disasters generated $270 billion in “economic” losses, of which only 40% were covered by reinsurance, according to a study by Signa of Swiss Re.

However, in the last five years, according to the rating agency Standard & Poor’s, the reinsurance sector has generated underwriting losses, with an average combined ratio (claims to premiums) of 102.3%, partly due to high losses due to natural disasters. “Our industry is under pressure”, summarizes Torsten Jeworrek, member of the management board of Munich Re, which oversees reinsurance.

But the biggest players in the market, such as Munich Re or Swiss Re, have every intention of seizing this opportunity for price increases to consolidate their positions, or even to increase their market share. , especially in natural disasters. “We do not intend to reduce our capacity in the next changes in January”, emphasized by Torsten Jeworrek.

Not at any price, of course. “To meet demand, we need to improve our underwriting margins to better reflect the risks and cost drift of claims,” specified Thierry Léger of Swiss Re, which also intends to continue its growth strategy, including the natural disaster market.

The rating agency Standard & Poor’s clearly identified in a study of the sector the division of the market between those who increase their capacities and those who can reduce them. Munich Re and Swiss Re, number one and two in the sector, are clearly in the first category. The French SCOR falls into the second category.