Moody’s warns over risk of claims inflation

Moody’s has changed its outlook for the global property and casualty insurance sector to negative from stable, reflecting high claims inflation, the gradual return of claims frequencies to pre-pandemic levels and rising reinsurance costs.

“We expect the sector’s underwriting profitability to weaken due to a combination of weaker economic growth and competitive pressures that will hinder insurers’ efforts to push through counterbalancing price increases,” says Christian Badorff, a vice president and analyst at Moody’s Investors Service.

In all regions apart from Asia, higher consumer price inflation has fuelled a significant increase in claims inflation this year, with North America and Europe the most affected, according to Moody’s.

Claims increases have been strongest in lines such as motor insurance, reflecting the rising cost of spare parts and replacement vehicles.

Indeed, it adds, the catastrophe claims burden will grow for global P&C insurers in 2023, with primary insurers set to absorb more losses as reinsurers take a smaller share.

This trend is a function of higher pricing driving insurers to buy less cover, but also the reduced availability of reinsurance capacity also impacting the ability of companies to protect themselves as well.

With reinsurers cutting back catastrophe capacity 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.

Changes in terms, such as higher attachment points, will also drive a greater retention of losses lower-down, which will eat into profits for primary insurers, Moody’s added.

In addition, Moody’s suggested that primary P&C insurer pricing power will be reduced, largely due to economic conditions, making it harder to offset higher reinsurance costs and higher loss costs.