Tuesday, December 20, 2022
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Reinsurance: a microcosm featuring catastrophes, inflation and capital flight

Participants in the world’s reinsurance industry are meeting in Monte Carlo. In the pricey principality, the talk is of higher premiums. Hannover Re said it would seek double-digit rate increases in 2023. Swiss Re and Munich Re have also forecast higher rates.

That news is good news for the industry but bad news for businesses and consumers. Reinsurers provide crucial financial protection to insurance companies, which are likely to pass on the increased cost in their premiums.

The hardening of the market partly reflects surging demand. The natural catastrophe reinsurance market is forecast to grow 37 per cent to $48bn over the next four years, Swiss Re said on Monday. Soaring inflation is driving up costs and the value of assets insured.

Price rises also point to declining capacity. Some reinsurers, including Axis Capital, Axa and Scor, have dropped or scaled back their exposure to natural catastrophes. That shows how badly reinsurers have been affected by such claims and the impact of Covid-19. Over the past five years, the average combined ratio of reinsurers — claims and costs as a percentage of premiums — was about 101 per cent. That denotes an underwriting loss, says Moody’s.

Rising interest rates have also affected capacity. Higher bond yields have reduced investor appetite for insurance-linked securities. The fall in the market value of bonds is crimping reinsurers’ capital. Investment losses are the main reason this fell by 11 per cent to $647bn in the first half of the year, according to broker Gallagher Re. That said, in the medium term higher rates should benefit reinsurers, partly by increasing investment returns.

Unlike US and Bermudian reinsurers, the European sector has continued to struggle in the first half of this year. It has heavier exposure to Australian floods, European windstorms and the war in Ukraine.

Shares have lost ground. They trade on multiples close to their 10-year average. Hannover Re, Swiss Re and Munich Re have price/earnings multiples of 12, 10 and 10 times respectively.

Reinsurers are at the sharp end of disasters. But unless catastrophe losses are unexpectedly bad, profitability should rise on the back of improved investment yields and higher prices.

The prospect of less capital chasing business is set to restore much needed pricing power. That should cheer finance directors at reinsurance groups as they pay chief executives’ hefty expense claims for jaunts to Monte Carlo.

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