Premium growth remained positive with an average increase of 11% in Q1 supported by continued favorable pricing for commercial lines and reinsurance business, according to Gallagher Re.
Underwriting results were strong with (re)insurers posting a 94% combined ratio (Q1 21: 96%), driven by favorable rates and a lower natural catastrophe loss impact compared to last year.
However, Gallagher Re also said that declining equity markets had contributed to a drop in ROE from 14% to 9% between Q1 2021 and Q1 2022. Despite the solid operating results, reported shareholders’ equity across the firms surveyed saw significant declines driven by the impact of higher interest rates causing a fall in the value of bond portfolios and equity holdings.
While premium growth was positive, the firm said that a ‘careful watch’ across the industry needed to be kept on claims inflation.
The firm wrote: “Increases in economic inflation, and an expectation that this trend will continue, have created more uncertainty around ultimate losses that will be incurred to settle claims. These factors, as well as the impact of the sustained low interest rate environment on net investment income, have driven the higher rates.
“Companies are achieving rate on rate increases in many cases for the fourth consecutive year. Some management teams noted that they are carefully monitoring trends in pricing and claims inflation and will adjust premium growth where required to support profitability.”
Inflation has been a recurring topic with the firm in recent weeks. On 13 May, we reported that Gallagher Re had suggested reinsurance adjustments to mitigate pressure in this area. Back then, the broker noted that the debate around inflation had moved on from whether it will spike to how long it will last, with financial markets beginning to price for a prolonged period of high-inflation conditions.
The firm now say that underwriting results were ‘exceptionally strong’ across the industry with an average combined ratio for the reinsurers it tracked of 94% in Q1 2022, compared to 96% in the previous year.
As has been the topic in recent weeks, the Russian aggression against Ukraine is a factor. In April, Gallagher had said there was renewed uncertainty for the aviation market because of the invasion.
Gallagher Re wrote: “Although not a significant driver of overall Q1 results, some (re)insurers established reserves for claims exposure relating to the war in Ukraine. Looking ahead, we will continue to monitor these exposures as claims emergence becomes clearer. One of the biggest challenges over the next three quarters is continued increases in social inflation due to its impact on loss costs and loss ratio trends, especially in the more liability exposed lines.”