High claims inflation and rising reinsurance costs are among the factors that prompted Moody’s Investors Service analysts to change their outlook for the global property and casualty insurance industry from stable to negative, the agency said. rating.
In a report on Monday, the company also cited the fact that claim frequencies are gradually rising to pre-pandemic levels in support of the decision to change the outlook.
“We expect the industry’s underwriting profitability to weaken due to a combination of weaker economic growth and competitive pressures that will hamper insurers’ efforts to push through compensatory price increases,” said Christian. Badorff, vice president and analyst at Moody’s Investors Service, in a statement. on the report.
The report also reveals significant variations in Moody’s P/C insurance outlook by region, with the commercial insurance sector in the United States, as well as the insurance sectors in China and Japan maintaining a stable outlook. , while individuals in the United States and several European countries (Germany, France and the United Kingdom) — have a negative outlook.
Part of the explanation for the difference in outlook for the business and personal sectors in the United States comes down to pricing power. Moody’s believes that commercial insurers are better able to raise prices in response to rising claims costs. As the economy weakens, personal line customers will “naturally seek the cheapest protection possible,” the report said. Also noting that governments can put pressure on insurers not to rein in price increases that would make customers’ economic hardship worse, the report notes that public regulators have so far given the go-ahead to price increases. , which is not the case in France, where insurers have agreed to adjust prices upwards at a rate lower than that of inflation.
The report also highlights competition as a factor that may slow needed price increases in some regions, pointing, in particular, to competition from mutual insurers that are less focused on bottom line profitability. “The recent rise in interest rates, which over time will support higher investment returns, may also encourage some insurers to refrain from raising prices for now,” the report said.
In a section of the report devoted to economic trends and claims inflation, Moody’s notes that while the economies of the United States and Japan are expected to weaken in 2023, China’s economy is expected to grow. This year, China’s continued COVID-19 lockdowns have contributed to supply chain disruptions at a time when developed countries have eased their COVID restrictions and seen surges in demand for consumer goods. Soaring energy prices following the Russian-Ukrainian conflict have fueled consumer price inflation – and claims inflation, in turn – in developed countries in North America and Europe, the report says.
Although claims inflation is most evident in short-tail lines like auto insurance, the spread of claims inflation to long-tail lines could force the strengthening of loss reserves, the report said. In the United States, in particular, social inflation and medical claims inflation are accelerating.
The report also discusses the positive and negative impacts of changes in interest rates on income and capitalization.
Compounding other negative outlook factors for primary P&C insurers, Moody’s report highlights the fact that insurers will likely bear a greater share of the burden of natural catastrophe losses themselves in 2023, as reinsurers reduce their capacity and raise prices in response to their own profitability challenges. Like other rating agencies recently commenting on the reinsurance marketMoody’s analysts cite a 15% jump in the US Property Catastrophe Rate-on-Line index calculated by Guy Carpenter between January and July 2022which has brought U.S. property and casualty reinsurance prices back to 2012 levels. This comes as the primary insurer faces an increase in catastrophic losses not only from primary perils such as hurricanes, but also from secondary perils of floods and wildfires, which the report said accounted for 60% of all disaster losses, on average, over the past three years, based on information of Swiss Re.
According to one definition in the report, a negative sector outlook reflects Moody’s view of credit fundamentals over the next 12 months. Distinguishing sector outlook from rating outlook, Moody’s said the rating outlook also reflects the specific characteristics and actions of issuers.
“A sector outlook does not represent the sum of upgrades, downgrades or ratings under review, nor an average of rating outlooks,” the report states.
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