Property cat rates must rise 50% to offset rising claims costs, restore profitability: EY

Against the backdrop of increasing impacts from climate change, consultancy EY has suggested that property catastrophe reinsurance rates need to rise by 50% at the 2023 renewals, just to offset rising costs of claims and to restore profitability for the re/insurance sector.

EY’s commentary is largely focused on the UK specialty insurance market, which makes the suggestion that rates for property cat cover need to rise 50% even more astonishing.

UK reinsurance renewals were not expected to rise by these levels, despite the hard market and even for property cat treaties.

But EY believes the industry needs it to support its future profitability.

It’s another sign that, with the benefit of hindsight, many are now accepting prices had softened too far and that catastrophe reinsurance rates have failed to keep up with the changing exposure profile, risk environment, inflation, and loss trends over the last decade or more.

Ben Reid, UK Head of Specialty Insurance at EY, explained, “Specialty insurance firms will need to be highly disciplined to outperform in 2023. Data suggests that climate change is contributing to a greater frequency of natural disasters – especially hurricanes – whilst macro-economic and geo-political circumstances are directly impacting intermediaries, insurers and their customers. According to our analysis, cat events have in fact cost UK insurers more than double over the past six years than the preceding decade, with average major claims having risen from £1.6bn between 2007 and 2016 to £3.6bn between 2017 and 2021.

“As insurers look to achieve greater profitability next year, a core focus will be maintaining a tight risk appetite across all lines of business, particularly cat, and making the necessary rate adjustments in its 2023 renewals.

“We estimate that property cat rates will need to rise by 50% on renewal in 2023 to offset rising claims costs and help restore profitability.

“Alongside a focus on underwriting discipline and cost management, the market will also need to closely monitor regulatory change and the tax reforms that are expected down the track in 2023.”

Rodney Bonnard, UK Insurance Leader at EY, also said, “Home and motor insurers are set for a challenging 2023 as rising interest rates and a weakening economic picture affect pricing and demand. Although rising interest rates, along with the prospect of falling inflation over 2023 will help insurers’ overall profitability, the wider economic environment of declining household incomes, cost of living pressures and an uncertain housing market is expected to affect demand significantly and negatively across personal insurance lines.

“In an environment such as this, where household finances are delicately balanced, insurers may need to rein back any prospective price rises to retain business and prevent customers from being under-insured while at the same time carefully balancing claims and other cost inflation.

“While next year is certainly not going to be easy, insurers crucially remain in a strong capital position and can continue to help customers through this difficult period.”

If property cat rates rise significantly in the UK it could become a pressure on some insurer profits, as European regions have benefited from particularly soft reinsurance pricing for a long time.