Even before the coronavirus crisis hit, the reinsurance industry was in a period of significant rate hardening, which will likely continue over the next two years, or even longer, according to Munich Re.
Such price increases became necessary after 10-plus years of eroding prices and weakening terms and conditions, which has led to a “significantly reduced profitability [for] the whole industry,” said Torsten Jeworrek, CEO of Munich Re’s reinsurance business.
He spoke during a virtual Monte Carlo media conference, held in lieu of the Rendez-Vous de Septembre, which was cancelled this year as a result of the COVID-19 pandemic.
A second driver of the hardening market has been the higher loss activity seen over the past few years in a number of markets and segments and lines of business, which include both large losses and catastrophe losses, Jeworrek said. He pointed to events such as Hurricanes Harvey, Irma and Maria (also known as “HIM”) in 2017, wildfires in the United States and manmade claims from satellite losses and various aviation losses, including the grounding of the Boeing 737 MAX in 2019.
Social inflation, particularly in the United States, is also pushing higher casualty losses for the industry. Jeworrek said the industry has seen a significant increase in the basic loss ratio since about 2014 – first affecting insurers and now also reinsurers.
In a separate media conference, Swiss Re’s Group Chief Underwriting Officer Thierry Léger, said: “On the back of several years of claims deterioration and premium declines, the situation for the reinsurance industry has gotten worse again in 2020.”
Léger also cited social inflation as a major contributor to the industry’s worsening results this year, although social inflation has been around for many decades, and comes and goes in waves.
Over the past few years, it has worsened again, he noted. “Social inflation is actually fueled by a general anti-corporate environment. This really pushes plaintiff bars to develop psychology-based strategies to trigger juries,” he said.
“As a result, we can see that particularly the higher plaintiff awards, those above $5 million, have been increasing at quite a rapid pace over the last years,” Léger added. “And if you go beyond $100 million, those settlements … in the hundred millions or even billions, you can see an even stronger increase.”
Another driver of the hardening market “is significantly lower interest rate levels, which we see in most major markets, particularly now, after the COVID events and development,” Jeworrek said.
Léger blamed declining interest rates for worsening the industry’s loss ratio by 5% during the first half of 2020. “This really means that the timid price increases we have seen have been offset by that further decline in interest rates.”
While there have been increases in premiums, they have been hardly enough to offset the interest rate decline of the first half of this year, he said.
“Also, these premium increases have … not been able to compensate for many years of premium decline before. And they have in no way been able to compensate for the increased claims load that we are observing around us. As a result, we see a real need for strong price increases to get back to underwriting profits,” affirmed Léger.
Although property catastrophe rates have been rising since the HIM losses in 2017, Jeworrek said, they are not back to the levels seen 10 years ago.
“All these three factors: erosion of profitability and prices, loss activity, and interest rate levels lead to this hardening, which is I think undisputed at this time,” Jeworrek said. As a result, at least for the next one or two years, “I’m convinced we will see more hardening in reinsurance than on the primary side. And the market’s biggest drivers are Asia and North America.”
And, of course, the COVID-19 pandemic is also having a major impact on the market, providing an impetus for further rate hardening.
“Market estimations of the immediate impact related to COVID-19 are $50 billion to $80 billion in claims. So far, the industry has booked only $20 billion, so it looks like there is much more to come,” said Léger, noting that the environment continues to be uncertain with rising death and infection rates.
“We also observe that whilst certain countries are still fighting the first wave, many other countries are now already fighting the second wave,” Léger continued. “We all wait for vaccines, but the uncertainty of when those vaccines will be available and whether those vaccines will be effective, is still very high. So COVID-19 not only had a very large impact already, it’s going to remain with us for quite a while.”
Stefan Golling, head of Munich Re’s corporate underwriting, discussed the huge uncertainties that are still ahead for the industry with COVID-19. “First of all, we could expect some secondary impacts on classes, like for example, the credit business or liability classes like D&O.”
Further, he noted, “we are still in the middle of the crisis, and the second or third wave could lead to an increased amount of losses.”
Munich Re estimates the industry’s COVID-19-related property/casualty losses will range from US$30 billion to $100 billion, coming from various lines of business, such as the travel business, event cancellation business, credit business and workers’ compensation. Munich Re has so far reserved €1.4 billion (US$1.6 billion) for its P/C claims in the first half of 2020.
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