For several years, reinsurance rates have remained relatively stable. However, large natural disasters in recent years have led to higher costs.

Renewal rates have started to climb and this trend is expected to continue, but there’s little agreement on how and in what circumstances. The industry is in flux and risks continue to grow in numbers and complexity.

Ratings Agency Estimates

While ratings agencies generally anticipate rate hikes, their estimates vary significantly. S&P anticipates rates will rise by about 5%. Moody speculates a range of between 0% and 5%, while Fitch predicts between 1% and 2%.

Swiss Re predicts further rate increases for loss-affected and underperforming businesses. However, unaffected areas would remain relatively stable.

Higher Regional Increases Likely

The above figures are average estimates, but some regions may face much higher increases. For instance, S&P suggests areas hard hit by weather-related claims, such as California, could see rate jumps between 30% and 70%.

Hurricane-prone areas such as Florida, Texas, Louisiana, and North Carolina and South Carolina can also expect significant rate hikes. Tornado and flood-prone states may also see rates higher than anticipated norms.

Changing Risk Landscape

The reinsurance industry is also undergoing rapid change and facing more and increasingly complex risks. Markets in disarray inevitably lead to higher rates due to the difficulty in accessing risk.

Some suggest risk modeling is not enough to predict secondary perils such as wildfires, floods, droughts, and cyber risks. This demands new approaches to model and price the impact of social inflation in a very volatile, faced-paced environment.

Even if insurers and reinsurers should find a way to predict these variables, they also face increasing liability insurance costs in the U.S.

Data Underutilized

Swiss Re reports primary insurers also find it very challenging to use the data they have at their disposal. They suggest it requires “profound know-how, specific skills sets, and the right resources” to create value from the extensive data they collect.

Data is meant to fairly assess, price, and manage risk. Without utilizing it properly, primary insurers can’t tailor their offerings, accurately predict the types of risks they’re facing, or help customers mitigate them more effectively.

Population Shifts

Besides the challenges of a changing risk landscape, re/insurers must also grapple with population increases, increased longevity, and more accumulated assets. All these factors expose them to more risk.

Swiss Re estimated a record-breaking $1.2 trillion protection gap for major risks such as natural catastrophe, mortality and healthcare spending in 2018.

Eroding Excess Capital

The Swiss multinational investment bank and financial services company, UBS, estimates the reinsurance industry’s in an excess capital position of around $30 billion. However, the estimated 2019 natural catastrophe losses for 2019 were $70 billion. Obviously, this trend can’t continue if the industry wants to thrive.

Re/insurers have always charged premiums based on estimated expected losses. Until the industry finds new ways to predict these losses, rates will probably continue to rise and will vary greatly between regions.

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