How inflation is factoring into reinsurance results

The first half of 2022 saw robust premium growth and generally strong underwriting results for global reinsurers, but inflation remains a wild card, according to the latest Aon’s Reinsurance Aggregate (ARA) report series from one of the world’s largest brokerages.

“The long-awaited adjustment to higher interest rates will ultimately boost reinsurers’ profitability through higher investment returns, but the speed of the change is having a significant short-term impact on asset values,” said Mike Van Slooten, head of business intelligence for Aon’s Reinsurance Solutions division. “In addition, high inflation is creating uncertainty around future and legacy loss costs, which may need to be addressed through higher pricing and/or additions to prior year reserves.”

ARA tracked the financial performance of 21 global reinsurance carriers during the first half of 2022 (ending June 30). These companies underwrite more than half the world’s non-life and life reinsurance premiums, meaning the composite is a reasonable proxy for the reinsurance sector as a whole, Aon plc said in a release Monday when the latest report was released.

While 2022 H1 saw robust premium growth and generally strong underwriting results, “overall earnings and equity positions were heavily impacted by unrealized losses on investment portfolios, driven by rising interest rates, widening credit spreads and declining stock markets,” Aon reported. “These effects are being felt across the global insurance and reinsurance industries.”

The report said 2022 H1 was notable for “an unusual amount of volatility in the capital markets.” The pandemic-related inflationary spike that began in 2021 was exacerbated by Russia’s invasion of Ukraine in February, prompting aggressive interest rate hikes that, in turn, have raised fears of recession. For U.S. stock markets, it was the worst start to a year in more than half a century, Aon reported.

Overall, gross and net property and casualty insurance and reinsurance premiums rose by 10% year-over-year to $149 billion, Aon said. “Growth would have been stronger at constant exchange rates.”

P&C underwriting profit rose by 22% to $7.4 billion, representing a net combined ratio of 93%, down from 93.7% in the first half of 2021.

“Underwriting results have shown significant improvement over the last 18 months, despite ongoing high levels of insured losses from natural catastrophe events,” the report said. “This reflects the benefit of compound rate increases, coupled with movement away from low-lying layers and aggregate covers.”

Total capital reported by the 21 ARA companies fell by 15% to $230 billion over the six months to June 30, 2022, partly reflecting strengthening of the U.S. dollar relative to the euro. The three largest companies (Munich Re, Fairfax and Swiss Re) represented 36% of the total.

Production of the report was overshadowed by the “devastating impact of Hurricane Ian, which will clearly influence underwriting results in the second half of the year,” Aon noted. “In addition, a continued rise in interest rates will further pressure total investment returns and reported book values.”

Risk modelling firm RMS predicted insured losses between US$53 billion and US$74 billion, with the “best estimate of US$67 billion” (not including an additional US$10 billion in losses from storm surge and inland flooding to the National Flood Insurance Program). The total includes wind and storm surge losses in Florida, South Carolina, North Carolina, Georgia and Virginia.

“Overall, 2022 seems destined to be another poor year for reinsurer earnings,” Aon said.