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Global insurance market to remain hard driven by increased demand and inflation

The hard market in (re)insurance is expected to continue, based on increased demand for coverage and because of inflation-driven higher values of insured assets, says Swiss Re Institute (SRI) in a new report.

In its sigma report titled “Natural catastrophes and inflation in 2022: a perfect storm”, SRI says that current supply-side stresses also underpin the hard market.

For one, industry capital has fallen in response to rising interest rates. Adding to capacity shortages, six years of weak results in property underwriting have reduced risk appetite. In the face of higher financing costs given interest rate rises, some capacity providers have become more cautious with respect to the potential for misalignment of risk assessment and loss experience.

SRI said in the report, “In our view, as higher exposures encounter shrinking risk appetite, momentum for rising prices, higher retentions and tighter terms and conditions will likely continue. “

Property catastrophe re/insurance rates rose to 20-year highs in the January 2023 renewals, continuing a trajectory that began in 2018, says the report. Demand for covers has grown as natural disasters continue to wreak property damage across the world. Natural disasters resulted in global economic losses of $275bn in 2022, of which $125bn were covered by insurance, the fourth highest one-year total on sigma records.

Beyond the natural catastrophes themselves, other factors such as the impacts of economic inflation and financial market losses have also fed into market hardening. An additional contributing factor has been the need for more discipline in the modelling and underwriting of secondary perils in particular. This has led to mismatches of risk assessment and actual exposures and, in turn, insufficient market capacity.

Economic factors remain the main driver of rising losses

The 2022 insured loss outcome reaffirms a 5?7% annual growth trend in place since 1992, this is based mostly on the rising severity of losses resulting from primary and secondary peril events. Today average annual insured losses of more than $100bn are standard. The biggest loss event in 2022 was Hurricane Ian (estimated insured loss of $50?65bn). Other large-loss events were floods in Australia and South Africa, hail in France, winter storms in Europe, and heatwaves in Europe, China and the Americas

Rather than the physical destructive force of natural catastrophes themselves, the main drivers of resulting high losses are economic growth, accumulation of asset values in exposed areas, urbanization and rising populations, often in regions susceptible to natural perils. SRI expects that these and the evolution of a range of present-day risk factors like climate change effects and, of late, inflation, will continue to drive losses higher.

Economic inflation has surged over the last two years, averaging 7% in the advanced markets and 9% in the emerging economies in 2022. Initially sparked by pandemic-induced supply chain disruptions and large monetary and fiscal stimuli, soaring food and energy prices due to the war in Ukraine have compounded inflation pressures.

The effect of high prices has been to increase the nominal value of buildings, vehicles and other insurable assets, in turn pushing up insurance claims for damage caused by mother nature. The impact has been most immediate in the construction sector. Increases in the costs for materials and labour because of shortages thereof have led to higher claims to cover the costs of building repairs.

SRI points out that the associated losses of secondary perils have been rising for many years. There is a need for greater discipline in the monitoring of the loss-driving secondary peril exposures and industry sharing of related findings. Lack of granular exposure data can also hinder understanding of all present-day risks.



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