Real estate reinsurance rates are likely to increase more than 10% on renewals in January

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Real estate catastrophe reinsurance rates should rise more than 10% when contracts are renewed in January 2023, according to a Fitch Ratings commentary

Fitch expects double-digit percentage increases in real estate disaster coverage premiums in 2023, driven by insured losses of approximately US$120 billion by 2022 and the increasing frequency and severity of natural disaster claims. (Typically, two-thirds of non-faculty reinsurance business is renewed in January, with a regional focus on Europe.)

Price increases will be most pronounced in the regions hardest hit by natural disasters in 2022, including Australia, Florida and France, Fitch said. $35 billion to $55 billion.

“Claims inflation has yet to be driven up by social inflation or headline inflation, but we expect this to change in 2023, negatively impacting insurance margins and reserves. Underestimating claims inflation for liability lines is one of the main risks for reinsurers.”

Increases in real estate cat premiums will support insurance margins against rising claims due to high inflation and climate change, Fitch said.

Capacity pressure

Fitch expects reinsurance capacity for property catastrophe risks to come under pressure in 2023, with selective capital inflows from existing or new risk bearers being more than offset by partial or full withdrawals by other reinsurers.

Furthermore, limited repurchase capacity will put additional upward pressure on real estate cat premium rates, the commentary continued. Fitch also expects stricter terms in 2023, including a shift to named all-risk coverage, higher deductibles and lowered limits.

“Nevertheless, we believe demand for real estate catastrophe reinsurance will be broadly met during the 2023 renewal season, except in Florida,” Fitch added.

“We expect significant premium increases for specialized industries, such as shipping and aviation, which have been hardest hit by the war in Ukraine. Motor hull premium rates will also rise in response to high inflation in spare parts, but increases for liability lines should be more moderate as more reinsurance capacity will be directed to this part of the market,” Fitch said.

“Claims inflation has yet to be driven up by social inflation or headline inflation, but we expect this to change in 2023, negatively impacting insurance margins and reserves. Underestimating claims inflation for liability lines is one of the main risks for reinsurers.”

Fitch now expects the combined ratio of the reinsurance sector to improve by about 4 percentage points in 2023, assuming a more normal level of losses from natural disasters and given the withdrawal of coverage related to the war in Ukraine. However, Fitch predicted that underwriting margins, excluding natural disasters and war-related losses, are likely to improve only marginally.

Fitch generally forecasts stable underlying profitability for the global reinsurance industry in 2023 and maintains its neutral fundamental sector outlook.

Investment income

The sharp rise in interest rates in 2022 has led to write-downs on large parts of reinsurers’ investment portfolios, significantly shrinking accounting capital due to the accounting mismatch between assets and liabilities, Fitch said. “However, the impact on economic and regulatory capital has been neutral to positive and we do not believe the industry’s capitalization has suffered. Depreciation has also depressed investment returns, leading to lower reported income for 2022, but rising reinvestment returns should gradually increase investment returns over time.”

Source: Fitch

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Trends Price Trends Real Estate Reinsurance

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