Reinsurers will continue to perform well on the back of supportive prices, favourable policy terms and higher investment yields, according to a Moody’s Ratings report.

The ratings agency says over the past five years, underwriting profitability has steadily improved as rising claims have prompted reinsurers to lift prices and reduce underwriting risk, while higher interest rates have boosted their investment income.

Unlike past cycles, rising prices have not triggered increased competition from new entrants and alternative capital providers.

“Overall, we expect conditions to remain favourable for reinsurers for at least the next 12 to 18 months,” Moody’s says in the report. “The industry has reassessed the risks it underwrites amid growing uncertainty over claims costs, and this will support prices.”

In the property line, reinsurers have raised the loss thresholds at which reinsurance cover is triggered and reduced their exposure to high-frequency, low- to medium-severity natural perils such as severe convective storms.

The report says lower exposure to high-frequency catastrophes means reduced earnings drag, thereby improving reinsurers’ ability to absorb large losses when they occur.

“Persistently high losses have prompted reinsurers to underwrite less of this risk, leaving primary insurers to bear a higher share of it,” the report says.

Last year, the median return on equity for reinsurers significantly exceeded that of primary insurers because the latter absorbed most of that year’s high-frequency weather losses. Primary insurers’ earnings are now vulnerable to an accumulation of low-severity weather events.

The report says there remains significant “unmet” demand from primary insurers for reinsurance solutions around low-severity weather events.

“Reinsurers will likely accommodate this to an extent as competition intensifies, but we do not expect them to fully restore previous levels of exposure. More sophisticated data and modelling that reduces the gap between actual and estimated losses will be needed to convince reinsurers to provide significantly more capacity.”

Extreme weather remains a risk but could support prices, the report says. Reinsurers have retained or increased their exposure to major catastrophes such as Atlantic hurricanes, attracted by favourable pricing.

“Reinsurers’ current strong profitability supports their ability to absorb large hurricane losses,” the report says.

In casualty, claims trends for long-tail US exposures have been unfavourable, reflecting increased litigation and higher jury awards.

“Reinsurers are likely to add to their reserves to counteract this. While casualty prices are rising, the improvement has been counterbalanced by higher claims, leaving profitability largely flat.”

From Insurance News magazine: As the US grapples with unprecedented fire, flood and storm risks, what lessons can Australian insurers learn?