Social inflation and nat cat losses to see hardening continue through 2022, says Swiss Re

Rate hardening in (re)insurance is expected to continue through 2022, according to Swiss Re Institute in its latest Economic Insights. It notes that tighter capacity has been mostly the result of reduced risk appetite rather than capital shortage, and this is the result of uncertainty from social inflation, together with natural catastrophe and pandemic-related losses. Thomas Holzheu, chief economist Americas, Swiss Re Institute, states in the report: “The reduction in re/insurers' risk appetite is driven by modelling uncertainty in an environment of ambiguity about macro developments and volatile capital markets. Elevated modelling uncertainty arises from multiple factors including social inflation, which has pushed up US liability claims; prior-year adverse reserves development; uncertainty around Covid-19 business interruption losses; successive years of above-average cat losses; continued uptick in secondary peril losses; and increased scrutiny of the modelling of climate change impacts.” On the issue of social inflation, the report notes that US liability claims growth has been trending higher since about 2015. It says the current episode of social inflation relates to single-claimant cases rather than mass tort and is not caused by legislative changes. “Key drivers of recent social inflation include the trial bar increasingly using psychology-based strategies, data analytics, digital media advertising and litigation funding. Other factors relate to jurors' attitudes to issues like social injustice, rising inequality and negative sentiment toward corporations. The uncertainty about liability reserves and pricing new business is particularly affecting excess liability and liability reinsurance treaties,” the report states. It adds that the impact of low investment returns on re/insurer earnings is a further factor pushing up re/insurance rates. Despite rises in the first quarter this year, interest rates and consequently investment returns remain low by historic standards. “This places more focus on underwriting profitability to make up for the lost investment income in order to compensate investors for their cost of capital. Meanwhile, macro risks are elevated, with an increasing focus on rising inflation and interest rate scenarios, which can trigger adverse reserves development and losses in asset valuations,” Swiss Re says. Capital shortage is not a driver, says the report, noting that last year's capital losses were temporary as asset valuations recovered quickly from the lows of March 2020. According to Aon, global reinsurers, including a few new players, raised close to $15bn of capital in 2020 to take advantage of the hard-market opportunities created by attractive rates, according to Aon. However, Swiss Re explains that the reinsurance capacity provided by third-party capital is an important contributor to property cat lines of business. It says a reduction in capacity in collateralised reinsurance, which has suffered poor returns in recent years, is contributing to selective tightening in the retrocession market and is also a factor in rate hardening in the reinsurance market.

Social inflation and nat cat losses to see hardening continue through 2022, says Swiss Re

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