The turnaround in interest rates has been initiated, the price level has risen after the high claims of recent years and the pandemic has not been as bad as feared for reinsurers.

Nevertheless, it's not enough for the industry to get rid of one flaw: a negative assessment of the situation by the rating agency Standard & Poor's.

The tailwind is not yet enough to be stronger than the continuing headwind caused by adverse circumstances, said S&P analyst Johannes Bender in an online press conference on Tuesday.

Phillip Krohn

Editor in business, responsible for "People and Business".

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Inflation in particular is causing uncertainty, because reinsurers cannot foresee how high the compensation for their customers' customers, the primary insurers, will be if inflation remains high.

"There will be challenges with regard to claims payments and provisions," said Bender.

Natural disasters would have reduced earning power.

Fluctuating conditions on the financial markets also ensure that the capitalization of the industry fluctuates.

Munich Re, Swiss Re and their competitors have had a hard time earning their cost of capital for a number of years.

But despite the overriding issue of inflation, there are also clear rays of hope.

“The year started with a robust capital base.

This is an important component of the large risks that are taken on,” said the analyst.

Due to the turnaround in interest rates on the capital markets, the industry was able to achieve reasonable investment income through fixed-interest securities for the first time in a decade and a half.

The phase of zero interest forced the industry to exercise price discipline

Ever since the phase of zero interest rates had been initiated, reinsurers had only been able to maintain their profits through price discipline towards their customers and a clear focus on profitable underwriting.

Now the relationship will change.

“We will see higher investment income because of rising interest rates.

Returns on reinvestment are increasing, and investment income will contribute more to earnings in the medium term,” said Bender.

In contrast to this mixed picture is the assessment of the individual companies.

The average rating of the 40 largest companies in the industry is A+, with three quarters of all reinsurers achieving this rating or better.

The rating agency's view is shaped by the overall economic situation and the many negative outlooks in the reports on individual companies.

The rating specialists expect that inflation could drop slightly again in the coming year and reach the long-term average again in 2024.

As a result, the forecast for the return on equity is lower than usual at 3 to 5 percent.

In 2019 and 2021, it even averaged more than 9 percent.

The claims/expenses ratio, which indicates profitable insurance business below 100 percent, was recently positive.

The price environment is positive for the industry

Outside of the natural catastrophe business, the industry had managed to achieve better values ​​every year due to price increases.

The market continues to be tough in many business areas – i.e. it has prices that make reinsurers profitable.

"The price environment is positive and that will continue in 2023," said Bender.

Price increases would have to be viewed in the light of inflation.

Alternative investors were less dynamic than in previous years.

Over the years, their assumption that catastrophe bonds are a reliable alternative to other financial stocks has proven to be correct.

Because investors are forced to pay out when loss events reach a certain level, the development of returns is not correlated with that in other markets.

Natural disasters are not linked to economic developments.

It is different with some forms of bilateral contracts for reinsurance protection (collateralized reinsurance).

The industry will meet in Monte Carlo next weekend for the first time since the outbreak of the pandemic to discuss the situation and prepare contracts.

Unlike non-life reinsurance, the life line will not play a role there.

It has been more volatile over the past two years.

The return on equity, which is traditionally between 8 and 10 percent, fell to 4 percent due to higher mortality during Corona.

"But that wasn't as serious as one might have feared," the S&P analyst said.