Property Cat Reinsurance Rates Likely To See Significant Increase

Reinsurance rates for property catastrophe coverage should increase by well over 10 percent at January 2023 renewals, according to Fitch Ratings.

The higher reinsurance premiums will support underwriting margins against rising claims due to high inflation and climate change, according to the rating agency.

Fitch noted that typically two-thirds of nonfacultative reinsurance business is renewed in January, with a particular regional focus on Europe.

"Increasing prices and higher reinvestment yields will help to offset the effects of rising claims inflation and lower asset values," Fitch said in a statement. "Fitch therefore forecasts broadly stable underlying profitability for the global reinsurance sector in 2023, and is maintaining its neutral fundamental sector outlook."

The rating agency said the double-digit percentage premium rate increases for property catastrophe coverage in 2023 will be driven by insured losses of approximately $120 billion in 2022 and the increasing frequency and severity of natural catastrophe claims. Those price increases will be most pronounced in regions that were worst affected by this year's natural catastrophes including Australia, Florida, and France, Fitch said.

Hurricane Ian likely caused between $35 billion and $55 billion of insured losses, Fitch said, making it one of the costliest natural catastrophes on record.

"Fitch expects reinsurance capacity for property catastrophes risks to be pressured in 2023, with selective capital inflows from existing or new risk carriers more than offset by partial or total withdrawals by other reinsurance providers," the rating agency's statement said. "Furthermore, limited retrocession capacity will put additional upward pressure on property cat premium rates."

Fitch said it also expects tighter terms and conditions on property catastrophe reinsurance in 2023, including movement to named perils coverage from all perils, higher retentions, and reduced limits. "Nevertheless, we believe demand for property catastrophe reinsurance during the 2023 renewals season will be broadly met, except for Florida," Fitch said.

The rating agency said it expects reinsurance premium increases in liability lines to be more modest, as additional reinsurance capacity will be directed to that segment of the market. "Claims inflation has yet to be pushed up by social inflation or general inflation but we expect this to change in 2023, with negative implications for underwriting margins and reserves," Fitch said. "Underestimating claims inflation for liability lines is one of the most significant risks for reinsurers."