DThe world of insurers has its own language. The most popular terms are „hard market“ and „soft market“. A hard market occurs when the demand for reinsurance exceeds the supply. In a soft market, there is an oversupply of reinsurance. In this situation, primary insurers, who have direct contact with end customers, transfer some risks that they could actually take on their own books. This is done for opportunistic reasons, as the premiums are low. This allows for an increase in profit margin.
At the „Rendez-Vous de Septembre“ in Monte-Carlo, the largest gathering of reinsurers and their clients worldwide, Munich Re, the industry leader, had an important message. „The capacity in the reinsurance market is increasing again.“ The world’s largest reinsurer referred to data from AM Best and Guy Carpenter. According to them, this year the reinsurance capacity will rise to $461 billion from $434 billion the previous year – both figures adjusted for equity effects due to increased interest rates.
However, this does not mean that the market, which was tough, if not extremely tough, last year, is softening again. „The market environment remains complex: uncertainties due to inflation, potential consequences of geopolitical risks or de-globalization, as well as dynamic risks such as climate change and cyber, are examples of this,“ says Thomas Blunck, a member of the Munich Re board responsible for underwriting insurance conditions negotiation.
Auf „Stabil“ hochgestuft
And that’s where the problem lies. „In principle, the trend is moving away from proportional contracts, where a certain percentage of the damage is covered by the reinsurer, towards non-proportional coverages, where the reinsurer only steps in above a certain level of damage,“ says Axel Flöring, Managing Director for Germany, Austria and Switzerland at Guy Carpenter, a globally operating broker for reinsurance services, to F.A.Z. Blunck also warns: „With appropriate rates and conditions, we are ready to increase our capacity further.“ In plain language, premiums will continue to remain high. A soft market is still far from sight.
The second-ranked global reinsurer is even more pessimistic when it comes to capacities. In the Sigma study publicly released in Monte Carlo, it states: „The Swiss Re Institute assumes that 2023 will be a transitional year in which the profitability of non-life insurers worldwide improves. This is because the industry continuously adjusts prices to reflect increased risks. At the same time, increased portfolio returns contribute to higher net capital gains.“
Swiss Re also warns that despite better prospects, the profitability of non-life insurers is expected to lag behind increased capital costs in 2023. Therefore, it is anticipated that 2024 will be characterized by further premium increases and capacity constraints. Jérôme Jean Haegeli, the chief economist of the insurance company, expects non-life insurers to earn their capital costs no earlier than „in one to two years,“ starting from 2025.
The reinsurers are doing slightly better. This is what the rating agency Standard & Poor’s (S&P) means, which recently upgraded the outlook for the reinsurance sector from „Negative“ to „Stable“. They assume that the 20 largest reinsurers in the world can earn their cost of capital with a return on equity of 9 to 12 percent in total. The credit rating agency Fitch agrees with this. They expect the return on equity of reinsurers to be 13.9 percent this year and 13.6 percent next year, according to Fitch analysts Brian Schneider and Robert Mazzuoli at the industry event.
Schwergewitter begünstigt
Ein Thema, das den Rückversicherern bei ihrem „Rendez-Vous“ im Fürstentum unter den Nägeln brennt, ist die Inflation. So fiel 2021 und 2022 die Inflation jeweils beinahe doppelt so hoch aus wie erwartet, heißt es bei der Munich Re. Inzwischen sinken die Inflationsraten wieder. Die Verbraucherpreisinflation in Industriestaaten dürften aber selbst im Basisszenario in den kommenden Jahren über den Notenbankzielen von etwa 2 Prozent liegen – und damit weit über den Inflationsraten früherer Jahre. Zudem sei die Unsicherheit beträchtlich: Spürbar höhere Inflationsraten sind als Risikoszenario deutlich wahrscheinlicher als der umgekehrte Fall mit geringeren Preissteigerungen.
The car insurers in this country are well aware of the impact of inflation in the industry, with a claims-cost ratio of 107 to 109 percent. This means that for every euro of premium, between 1.07 and 1.09 euros are spent on settling claims.
And the topic of natural disasters is also a recurring issue. Although the hurricane season, which is reaching its peak these days, has been relatively mild so far. However, extreme weather events such as wildfires and floods are increasing in both the USA and Europe. According to Munich Re, research predominantly suggests that climate change is favoring the occurrence of severe thunderstorms. Market damage data also show increasing trends from these events in Europe, as well as wildfires, hailstorms, and flash floods in many regions worldwide.
„In light of increasing demand, higher risks, and limited capacities, non-life primary insurers need to utilize their capital more efficiently. Reinsurers can offer primary insurers access to their balance sheet at costs lower than the capital costs of the primary insurers because the reinsurance portfolio is more diversified in terms of regions and risks,“ according to the study by Swiss Re.