No. We’re not talking about the ZZ Top song. We’re talking about the pressure insurers are feeling from a very difficult reinsurance market.
According to an article in beinsure.com, “Global Reinsurance Market 2023: Challenging Renewals & Realignment“:
Mounting pressures in the reinsurance market … were exacerbated significantly by Hurricane Ian … reinforcing one of the hardest reinsurance markets in living memory. Demand-side pressures coincided with a severe capacity crunch, as capital providers pulled back whilst others were only willing to maintain allocations … driven by a significant impairment of dedicated reinsurance capital, which fell sharply as investment grade securities experienced their worst performance in over 40 years … Reinsurers must now navigate an environment of rising inflation expectations and higher interest rates, which has driven assets lower on a mark-to-market basis … Capital erosion of 15.7% to USD 355 billion at YE22 … together with significantly higher premiums, sent the sector’s solvency margin ratio …. to below 100 … [leaving] certain reinsurers more exposed to liquidity and credit risks at a time of heightened claims uncertainty.
Amidst that bad reinsurance news, there’s better news for non-life insurers, according to Deloitte. In its “2024 global insurance outlook“, the consulting firm writes:
Premiums are forecast to improve in both 2023 and 2024 to 1.4% and 1.8% year over year, respectively, mostly due to rate hardening in personal and some commercial lines … profitability is expected to improve through 2024 as higher interest rates strengthen investment returns, premium rate hardening continues, and expectations for slowing inflation lowers claims severity … Even in this environment, where risks are increasingly becoming financially unsupportable, there may be opportunities available for proactive non-life insurers to generate long-term profitable growth.
So, Then What?
We recognize this is easy for us to say. But insurance, by its nature, is a long game. Economies run in cycles. Markets run in cycles. Profits and losses run in cycles. That’s why insurance is, also by nature, conservative. Financial success is determined by informed risk selection, adequate pricing, effective expense management, operational efficiency, and claims experience which is, by degrees, capricious and unpredictable.
And we recognize this is self-serving, but we also suggest using a core-processing suite that’s flexible and configurable enough to scale with your growth and to operate efficiently and cost-effectively enough to not break the bank when things get lean.
As it turns out, if you’re considering such a suite, we know some guys.
No. Not the guys in ZZ Top.