Swiss Re expects reinsurance market hardening through 2024

Swiss Re expects the “disequilibrium” between supply and demand to persist in non-life reinsurance through 2024 and, along with still challenged profitability, likely drive further market hardening throughout next year, particularly for property cat risks. Releasing a sigma study for the Monte Carlos Rendez Vous this week, Swiss Re Institute says it expects 2023 to be a transition year for the non-life insurance industry that will enjoy improving profitability as it continues to increase prices, while higher portfolio yields boost net investment income. But the study says that despite the stronger outlook, non-life insurers’ profitability is expected to remain lower than their increased cost of capital this year. The reinsurer says that following years of weak performance and above-average natural catastrophe activity, the reinsurance market is reverting to a more “sustainable level of risk-adjusted pricing”. “This trend is expected to continue at the upcoming January 2024 renewals,” it says. It expects the “disequilibrium in demand and supply of non-life insurance to persist, and thus a continuation of current hard market conditions, especially in property catastrophe lines”. Swiss Re argues that “further rate hardening and constraints on capacity are likely to continue throughout 2024”. It said in a separate statement that evolving nat cat risks and losses require underwriting adaptation. The reinsurer said demand for natural catastrophe property reinsurance is likely to remain high as exposures keep increasing. At the same time, the main risk drivers – extreme weather events, urbanisation, higher property values and inflation – remain unchanged, it pointed out. Therefore, an important discussion point at year-end reinsurance renewals and beyond will be the balance between reinsurance capacity and increasing demand for property risk cover. It expects a continuation of the trend that has seen reinsurers move up to covering the biggest losses and insurers covering more of the smaller claims. “Primary insurers are best suited to absorb frequency and attritional losses, while reinsurers are reverting to their core function, which is supporting insurers in recovering from large loss events such as the earthquake in Turkey earlier this year. This trend towards a more sustainable balance in risk sharing is expected to continue,” said the reinsurer. It also believes secondary perils such as wildfires, floods and hail will be a hot topic because modelling these risks remains challenging and the effects of climate change are becoming more evident. “To achieve more predictable outcomes, greater data transparency and investment in predictive capabilities are required. Swiss Re is carefully monitoring these exposures and has taken action to manage the evolving risk landscape,” it said. Swiss Re added that greater data transparency is required to understand underlying exposures in emerging casualty risk. “The casualty market will be another topic of relevance, as it faces a number of issues. Social and economic inflationary pressures are driving up claims costs. Litigation funding grew by 42% from 2019 to 2022, and a Swiss Re analysis shows that between 2014 and 2021, the number of awards over $5m in US courts grew by 54%. This trend is expected to continue, and while it is predominantly a US phenomenon, there are signs that it is emerging in other parts of the world,” it said. The reinsurer expects the non-life reinsurance market to grow above GDP for the next decade, driven by new risk pools and supported by continuous rate adjustments. Its ten-year outlook for the market in US dollars shows nominal growth of approximately 5.4% per year, or around 3% if adjusted for inflation. Swiss Re stressed that higher growth in industry capital is needed to narrow “large” protection gaps worldwide. For example, Swiss Re Institute estimates that US P&C industry capital has grown by 5% annually on average for the past ten years. During the same time, the need for natural catastrophe protection has grown at about 7% per year, on average. Swiss Re Institute estimates the global protection gaps for natural catastrophes, crop, mortality and health insurance at $1.8trn in premium for last year.

Swiss Re expects reinsurance market hardening through 2024

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