Tides turning for reinsurance on higher interest rates, lower Covid-related claims

REINSURERS are being lifted by a rising tide of higher interest rates and lower claims. Next year could be an even better year, as emerging Asia’s growing wealthy raise their purchases of life and health (L&H) insurance.

The reinsurance industry, which insures the insurance companies, was badly hit in 2020 by unusually high claims linked to climate-related catastrophes and the Covid-19 pandemic.

Munich Re, the world’s largest player, reported a 55 per cent decline in its 2020 profit. Swiss Re, the second-largest, reported a loss.

Singapore Reinsurance, which was listed on the Singapore Exchange at the time, reported a 47.7 per cent decline in its net profit. The company was acquired in 2021 by the Asian arm of Canada-listed insurer Fairfax Holdings, and delisted.

Reinsurance has since repriced significantly higher to factor in the increased cost of underwriting – demonstrating the industry’s pricing power.

Swiss Re’s property and casualty (P&C) reinsurance business, for example, turned in a profit of US$1.5 billion for 9M 2023, compared with a loss of US$283 million in the year-ago period.

The bigger catalyst for the industry, however, could be L&H reinsurance.

S&P Global Ratings noted in a report that elevated natural disasters, increasing cost of capital, financial market volatility, and inflation risk persist. The L&H segment of reinsurance did not see a similar impact.

In fact, market watchers told The Business Times that the pandemic proved fundamentals for the segment remained intact.

The pandemic and geopolitical tensions have created an “acute awareness” in many communities of the need for proper protection, apart from “fate, family, and friends”, said Chia Tek Yew, head of insurance for Asia-Pacific at Oliver Wyman.

Individuals are also increasingly encouraged to share rising medical costs that have become a burden for governments who provide national health schemes, he added.

“We are seeing younger communities entering the health and life market earlier,” Chia said.

Trupti Kulkarni, an insurance analyst at S&P Global Ratings, said reinsurers in some emerging Asian markets would be able to participate in developing the market and providing financial solutions.

S&P also noted the better operating conditions for L&H reinsurance: there are higher barriers to entry, it is less price sensitive than P&C, and there are significantly fewer market participants.

“Reinsurance buyers are sophisticated, precluding the need for intermediaries, and demand is driven less by available capacity and more by balance-sheet management,” S&P said.

In a seeming attempt to capitalise on this trend, Swiss Re in April split its reinsurance business unit into two: P&C and L&H. While its P&C business is still much larger, L&H is growing fast.

For 9M 2023, the P&C segment reported revenue of US$18.9 billion and profit of US$1.5 billion. This worked out to roughly 51 per cent of the group’s revenue and 61 per cent of profit.

L&H reported revenue of US$13.2 billion and profit of US$634 million, or roughly 35 per cent of total revenue and 26 per cent of profit.

Swiss Re is expecting L&H profit to hit US$900 million this year.

“It’s only when people start to get a bit more wealth that they are prepared to start thinking longer term about savings, and health and life insurance,” said Paul Murray, who was appointed as chief executive of Swiss Re’s L&H segment this year.

L&H also has a longer average term than P&C. The business stays on the reinsurer’s balance sheet for decades, said Murray, creating opportunities to capture certain tailwinds.

In the current high-interest-rate environment, a reinsurer can reinvest its large reserves into higher-interest-bearing products.

“(The protection business) is a bit more resilient to interest rate movements – we’re not subject to the same sort of supply and demand of capital that you get with interest rates,” Murray said.

Indeed, the return generated from investment income is higher for Swiss Re’s L&H segment than for its P&C segment.

For 9M 2023, L&H return on investment was 4.7 per cent. It was 2.5 per cent for P&C.

Fitch Ratings noted in a report that investment performance has benefited significantly from a rebound in equity markets and higher reinvestment rates.

The L&H segment should also benefit from the end of the Covid-19 pandemic, Fitch said, thanks to significantly lower excess mortality claims.

According to S&P, the sector is also likely to have strengthened its underwriting controls to reflect lessons learned from Covid-19.

Murray said Swiss Re should still see some Covid-related costs this year, but that these will hopefully go down to zero over time.

These positives are expected to boost reinsurance capital – the indicator of available reinsurance capacity – from its decline in 2022.

Oliver Wyman’s Chia noted that reinsurers in 2022 suffered from underwriting losses related to the pandemic and climate events, while investments registered significant mark-to-market losses.

Investment portfolios are now expected to be stable; and underwriting profits should be forthcoming, as insurers and reinsurers raise their rates.

S&P expects reinsurance pricing to be favourable due to hard market conditions in shorter-term insurances. In reinsurance, a hard market is associated with rising premiums and a soft market with falling premiums.

Jia Jingwei, a partner at Oliver Wyman, expects the reinsurance capital cycle will become longer, and will evolve to reflect rising uncertainty.

Traditionally, the reinsurance market turns from hard to soft every six to seven years. That may change as reinsurers build new value propositions and offerings.

“Insurance and reinsurance is a business of making future promises,” Jia said. “The whole industry needs to adjust and adapt to a new way of helping our clients stay resilient in this ever changing world.”