Shankar Garigiparthy,
CEO & Country Manager, India
Reinsurers have been supporting the Indian market for many years, and have been paying significant amount of claims. With a hardening reinsurance market globally, the Indian market is also likely to face these conditions, and some tough discussions as part of the renewal season is expected
Rating agency, Fitch, expects reinsurance capacity for property catastrophes risks to be pressured in 2023, with selective capital inflows from existing or new risk carriers more than offset by partial or total withdrawals by other reinsurance providers.
Furthermore, limited retrocession capacity will put additional upward pressure on property cat premium rate.
In a particularly difficult economic, financial and political context, reinsurers have no choice but to tighten up the conditions for treaty renewals for 2023.
According to EY, property cat rates may need to increase 50% to offset the rising claims cost.
Insurers will find capacity but at significantly higher terms and prices. This increase is posed to reach 10% or even 20%, particularly in the fire and natural catastrophe classes of business
While rate increases may be higher on catastrophe exposed risks, all risks will be subject to valuation discussion, which is also likely to drive rate and premium increases because exposures are growing and becoming more complex.
Even before Hurricane Ian struck, it was highly anticipated that catastrophe and non-catastrophe property reinsurance would become more difficult in 2023 due to the mismatch between supply and demand.
Globally, there is likely a $25B – $50B shortfall in capacity. At least $20B of new property catastrophe capacity is likely needed in the U.S., and rising inflation means most cedants will strive to purchase at least 10% more in reinsurance limits just to hold steady.
Even if certain avenues of recovery have been clearly identified, many uncertainties are still straining the market, namely:
· inflation, which poses a risk of claim underpricing,
· the level of financial investments, the amounts of which are becoming uncertain and are falling with the deterioration of the financial markets since September 2021, a decline compounded by the war in Ukraine,
· the decline in the capacities offered by the reinsurance market,
· the losses or strong reductions in profits,
· the low return on capital,
· geopolitical uncertainties,
· the maintenance of internal costs.
All these unfavorable factors to insurers will weigh heavily on the conditions offered by reinsurers. The former will find capacity but at significantly higher terms and prices. This increase is posed to reach 10% or even 20%, particularly in the fire and natural catastrophe classes of business.
Rating agency, Moody’s, has turned negative on the prospects of global property and casualty (P&C) insurers, with one of the main drivers being an expectation they will bear heavier catastrophe loss costs in 2023, as reinsurance becomes more expensive and less available.
With reinsurers cutting back catastrophe capacity and the ILS market having less alternative reinsurance capital available again, alongside a general firming of prices, the prospects for 2023 and a truly hard reinsurance market make retention of more losses almost guaranteed for the majority of P&C primary carriers.
Impact on Indian Reinsurance Market
Following the recent IRDAI circular dated 19th December 2022, allowing for a free market regime that foster prudent risk management and loss control, there is some concern that the property class of business could be under some pressure.
Whilst we are very much in favour of a free-market regime, we are also concerned with the potential impact on the underwriting discipline in the market, which could result in significant underwriting loss in the property class.
Also, with the proposed revision to the order of preference regulations which require 50% retention of premiums by cross border reinsurers, there could be some pressure on available reinsurance capacity in the Indian market, particularly as some reinsurers have withdrawn from the catastrophe market.
Reinsurers have been supporting the Indian market for many years, and have been paying significant amount of claims. With a hardening reinsurance market globally, the Indian market is also likely to face these conditions, and we expect of some tough discussions as part of the renewal season.
Also, given the hard reinsurance market conditions, it is possible for many of the cross border reinsurers to deploy their capacities in markets that are able to generate a better return on capital.
Such a move could lead to:
More retentions by the Indian cedants, or onshore reinsurers taking on more of the risk locally.
Either of the above will lead of pressure on the capital position of either the cedant or the onshore reinsurers.