How climate change is affecting catastrophe reinsurance prices

Property catastrophe reinsurance premiums are expected to rise in the 1/1 renewals in January 2023 due to high inflation, climate change, and heightened geopolitical tensions. Premium rates are predicted to increase by over 10%, especially for catastrophe reinsurance premiums which faced insured losses of about $120 billion in 2022. The most recent driver of premium raises has been Hurricane Ian which caused $35-$55 billion of insured losses. The reinsurance industry needs to bear most of these losses, putting a strain on this market and causing premium rises in the end-of-year contract renewal discussions.

There is also a fall in the supply of reinsurance due to a higher number of claims for natural catastrophes and poor underwriting results, which is making reinsurance companies cut back on their exposure and even resulting in the exit of some firms from this market. The average combined ratio of reinsurers—that is costs and claims as a percentage of premiums, was about 101% over the last 5 years which denotes an underwriting loss. Higher interest rates are also causing a reduction in capacity since investors are now keener to invest in bonds due to higher yields than in insurance-linked securities. This fall in supply accompanied by an increase in demand due to high inflation is causing premium prices to surge.

Reinsurers provide insurance for insurers and help them transfer a portion of their risk portfolio so that they can increase their underwriting policies and business. A rise in the premium rates of reinsurance will result in higher premiums for insurance overall. Top reinsurers such as Lloyd’s of London provide insurance to primary insurers and hence, determine what can be insured and at what price.

Reference: https://www.ft.com/content/cddcae5c-2783-4b40-9715-06104774248a