Primary insurers surveyed by a Moody’s Investors Service expect to pay more for both property and casualty reinsurance in 2023, but those willing to pay up for higher amounts of cover will likely seek property-catastrophe protection.

The rating agency released results of its survey of 39 cedents last week, on the same day it separately published an outlook report for global reinsurance sector. Moody’s is maintaining a stable outlook in spite of the key threat to profitability—inflation—the same factor that buyers point to as the reason for predicted price hikes.

According to the buyers survey, 85 percent of respondents expect property-cat reinsurance prices for the U.S. and Caribbean market to rise more than 5.0 percent next year. And even though cedents have increased their purchases of catastrophe reinsurance already in recent years, 43 percent expect to buy more in the coming year.

Interestingly, when asked about the prospect that the frequency and severity of natural catastrophes will increase in the next few years, over two-thirds of the carriers surveyed said they expect no increase in catastrophe risk, or just a minor increase. The other 32 percent expect moderate or material increases.

Survey respondents also foresee price increases across their broader property reinsurance portfolios, with 40 percent anticipating portfolio-wide property reinsurance price increases of 7.5 percent or more. For casualty reinsurance, 82 percent of cedents surveyed said reinsurance prices will likely increase, with 15 percent thinking that even casualty reinsurance prices will increase by 7.5 percent or more.

Overall, three-quarters of the respondents suspect that the main driver of the price increase is rising loss cost trends—with 54 percent citing loss cost trends driven by social inflation as a key factor in casualty reinsurance price jumps and 21 percent citing loss cost trends driven by economic inflation for property.

How much do they expect loss cost to rise?

More than half—56 percent—expect casualty loss costs to rise at least 5 percent, with 6 percent thinking they’ll jump more than 10 percent. In contrast, only 19 percent said they expected casualty loss costs would rise in 2022, when Moody’s conducted a similar survey last year.

Still, even though social inflation is a concern for casualty reinsurance buyers and even though they don’t see prices rise to the same extent as property-catastrophe reinsurance pricing, almost all (97 percent) will purchase the same amount of casualty reinsurance in 2023 rather than increasing coverage.

On the property side, when asked about loss cost increases, similar to the projections for casualty loss costs, 57 percent put loss cost jumps at 5 percent of more. But more of the property respondents said that loss costs would rise more than 10 percent—16 percent for property vs. 6 percent for casualty.

The report, “Buyers’ survey indicates claims inflation is driving reinsurance pricing momentum,” also summarizes survey responses to questions about planned changes in attachment points, the use of alternative capital and cyber reinsurance demand.

The distribution of survey respondents skews to larger carriers (about two-thirds write at least $5 billion in gross written premiums) and North America companies (64 percent).

In a separate outlook report, “Stronger earnings prospects and solid balance sheets underpin stable outlook,” Moody’s analysts explain their stable sector outlook, noting that balance sheets for global reinsurers have remained healthy in spite of financial market volatility and underwriting shocks.

And while reinsurers’ results have been volatile over the last five years, with COVID-19 losses and catastrophe claims pushing the average combined ratio to 101 (for reinsurers in Aon’s Reinsurance Aggregate), price hikes have steadily boosted “normalized” underlying combined ratios—ratios calculated to exclude the impacts to COVID-19 claims, above-average cat losses and reserve releases—over the period. In fact, the underlying combined ratio for 2021 came in at 98, Moody’s estimates—the best since 2012. (Editor’s Note: For the “normalized” combined ratio calculation, Moody’s uses an annual natural cat load of 8 percent for all years—those with above-average cat losses and below-average ones.)

Although the outlook report highlights inflation as a key threat to profitability going forward, rising prices and rising interest rates work in the other direction, the report says. Rising interest rates also boost economic solvency of reinsurers, boosting internal capital generation from increased investment returns, and also by reducing the discounted value of insurance obligations.

Like reports published by other rating agencies in the runup to the Rendez-Vous de Monte Carlo, the Moody’s outlook report also comments on the conservatism in reinsurer asset portfolios, the 2022 drop in shareholders equity (the adverse impact of rising interest rates bringing down the value of fixed income securities), the divergence in catastrophe risk appetites and the impact of climate change (increased in the unpredictability of claims from severe weather events).

Commenting on the 16 percent decline in reinsurers’ equity between Dec. 31, 2021 and June 30, 2022, the report notes that Moody’s expects reinsurers to recover most of their unrealized investment losses over time. Factoring into that prediction, the report references the ability of reinsurers to hold bonds to maturity, with the need to draw upon investments to meet property claims payments unlikely given that payouts usually can take 12-18 months or longer.