Moody’s: social inflation returns with a vengeance

Although large man-made claims were largely in line with budget during H1 2023, so-called “social inflation” appears to have re-emerged with a vengeance, resulting in higher claims, particularly for the underwriting years 2013-18, according to rating agency Moody’s.

The claim was made as part of its analysis of the H1 2023 performance of the four largest European reinsurers, who reported combined net results of 5.2 billion euros for the first half of 2023, up from 1.9 billion euros in the year earlier period.

According to Moody’s, both property and casualty (P&C) and life reinsurance contributed to stronger earnings, helped by improving underwriting profitability, as well as higher investment results. It added that the half-year results build a solid base for strong full-year 2023 earnings, subject to natural catastrophe experience.

However, Moody’s also said that it is currently not clear how much of the rise in social inflation claims – rising US long-tail liability claims due to higher jury awards – is due to catch-up effects following the hiatus of court proceedings during the pandemic or due to a continuation of the upward trend seen before COVID-19, adding:

“It is noteworthy that reported combined ratios, although generally strong, were negatively influenced by companies strengthening their reserves. We believe that in most cases companies have made use of the favourable market conditions to build reserve resilience in view of still high claims inflation and in preparation for a potential turn of the cycle.”

“For the three insurers reporting under IFRS, high interest rates resulted in a higher positive discounting effect on claims reserves than initially expected, which improved combined ratios by 2-3 % pts. For now, the corresponding negative effect via the unwinding of discount did not come through because of the low interest rates in the past, but this is a timing effect that will revert if interest rates get closer to discounting rates set in the past.”

For Hannover Re and Munich Re, Moody’s suggested, the strengthening of reserves is largely in line with the well-established approach to managing reserve resilience. However, it said, SCOR changed its approach by deliberately adding prudence to reserves in order to build conservatism in reserves. Swiss Re, still reporting under US GAAP, confirmed it would continue to reserve at best estimate – in line with applying accounting rules – and continue to opt for conservative reserving loss picks within the best estimate range. 

The report added that the combination of higher prices, lower frequency exposure and better quality wordings should be a significant support for stronger earnings going forward. With economic inflation likely having peaked, broad-based claims inflation – likely except social inflation – should also subside somewhat, easing pressure on current and prior-year underwriting.