Reduced reinsurance cover will make P&C results more volatile
By Benjamin Serra, Senior Vice President and Analyst, Moody’s Investor Service
Reinsurers have reduced the supply and increased the price of natural catastrophe coverage this year, forcing many cost-conscious primary insurers to retain more catastrophe risk themselves. We expect primary insurers’ financial results to become more volatile as a result, with more geographically concentrated and specialized companies worst affected. In contrast, diversified players should be able to adjust by swapping out some catastrophe risks for increased exposure to other risks.
Moody’s estimates that, for rare, medium-sized catastrophe events occurring once every 100 years, primary insurers will bear around 10% more of the insured losses this year than last. The increase rises to 10%-15% for smaller events occurring once every 10 years.
Hence, if reinsurance protection had been at current reduced levels already last year, the French primary P&C market would have absorbed additional losses of EUR700mn from the 2022 hailstorms. We therefore expect catastrophes to have a more negative impact on primary insurers’ combined ratios in 2023.
The impact will likely be more modest for large, diversified companies. This is because they are able to trim some of their gross exposure and take on more business in non-catastrophe lines to compensate. It will be more difficult for less diversified players to replicate this strategy.
Some may be forced to surrender market share or accept an increase in their reinsurance costs to avoid additional catastrophe losses. Alternatively, they may attempt to push through offsetting price increases, although the scope for price rises in the primary insurance market is limited by rising inflation and intense competition.
Positively, we foresee no material change in insurers’ solvency because of their increased catastrophe exposure. This is because their reinsurance protection has declined mainly for smaller catastrophe events, whereas exposure to larger events is a more significant driver of capital requirements.