17 Oct Reinsurance Costs Weigh on Insurance Pricing
COMMERCIAL INSURANCE companies are raising rates in most of their lines to account for increasing claims as well as the cost of claims, but another factor is forcing them to raise their rates further: reinsurance.
When insurance companies underwrite policies, they won’t retain all of the risk and instead pay a reinsurance company to cover a portion of claims or if claims reach a certain “catastrophic” level. These global reinsurance giants have seen their profits erode substantially in the last few years due to the rising cost of natural catastrophes around the world, higher claims costs and geopolitical events – forcing them to increase what they charge insurance companies.
These moves are now trickling down into the primary insurance market in the form of further rate increases.
Property catastrophe reinsurance rates- in the U.S. have risen by almost 15% in 2022 from the year prior, according to the Guy Carpenter U.S. Property Catastrophe Rate on Line Index. Another report found that reinsurance rates for liability insurance has also been on the rise, averaging nearly 13% between 2020 and 2021.
Reinsurance helps insurance companies pass on the cost of expensive claims by “ceding” – or paying – part of the premium to the reinsurer. In exchange the reinsurer agrees to take part of the cost of claims or claims above a certain amount.
Reinsurers taking steps to mitigate their exposure after being pummeled by a confluence of factors including:
- Increasingly large natural catastrophe claims payouts,
- Increasingly large jury awards in liability cases,
- Geopolitical uncertainty from the war in Ukraine,
- Liability payouts resulting from the COVID-19 pandemic,
- Skyrocketing inflation around the world, and
- Significant investment losses.
Reinsurers have responded in different ways:
Raising rates – A survey of insurance executives by Moody’s Investor Sevice predicts that reinsurance rates for property risks will increase between 7.5% and 10% at the Jan. 1, 2023 renewals.
Limiting capacity – Some reinsurers are pulling back and not taking on as much risk as they have in the past. They may limit exposure by capping the amount of policies or amount of coverage they are willing to underwrite.
Some have pulled out of underwriting policies for properties in high-risk areas.
Increasing attachment points – Many reinsurers are raising the attachment point for coverage, which is essentially like your insurance company raising your deductible.
That means the insurance company will be on the hook for a larger portion of claims costs. That in turn may prompt the insurer to raise its own rates.
What it means for you
When reinsurers raise rates and raise their attachment points, it trickles down to primary policies such as yours.
This compounds the effects that higher claims costs are already having on commercial policies.
There are signs that reinsurance rate hikes may accellereate in 2023. The insurance rating firm of A.M. Best Co. reinsurance rates have been lagging behind increases in primary insurance rates since 2018 and are now catching up.
As a result, “the pace at which pricing continues to harden for property catastrophe exposures seems to be accelerating,” AM Best wrote in a recent report.