The challenges faced by the reinsurance market in 2022

The continued recovery of rates in 2022 should enable reinsurers to address a number of challenges, including pandemic risks, weather risks and cybercrime, with the latter posing a growing threat to the entire industry.

As with Covid-19, a cyber mega-attack can bring the global economy to a complete standstill.

An atmosphere of uncertainty

The insurance and reinsurance market [4] is evolving in an increasingly unpredictable world, shaken by new risks that are ignored or underestimated, and sometimes difficult to model.

It is within this context of uncertainty that reinsurers are tightening the market.

Inadequate premium rates

In 2022, upward rate adjustments will turn out to be necessary to cope with the increase and intensity of risks, the decline in profitability and the persistence of low interest rates. This analysis is shared by Fitch Ratings [5], which considers the 2021 rates to be inadequate.

Sustained demand for coverage

Demand for reinsurance coverage remains high in the primary market. Due to the higher cost of claims, this increase in demand affects most classes of business. A tightening of the direct market will in turn lead to a readjustment of reinsurance rates. The increase in rates will mainly pertain to proportional coverage.

Impact of the Covid 19 health crisis

Even if the uncertainty linked to the evolution of the pandemic is beginning to wear off, caution is still required.

To maintain their technical profitability and protect their accounts, some reinsurers are taking no chances, excluding risks related to contagious diseases.

In addition to these exclusions, reinsurers are forcing cedants to clarify the clauses of their contracts.

Consequently, the activities impacted by Covid-19, namely credit insurance, damage-free business interruption and event cancellation, are subject to a "de-risking" policy, which means a reduction in risk exposure.

For the January 2021 renewals, Swiss Re [6], like its competitors, has drastically reduced its exposure to the pandemic in the P&C and third party liability insurance. Another strong measure is that the Swiss reinsurer has withdrawn from the event cancellation business which cost it 404 million USD in 2020.

The same goes for CCR Re which took advantage of the January 2021 renewals to introduce new exclusions.

Cost of the Covid-19 pandemic

By the end of June 2021, the pandemic has set the profession back 37 billion USD, 16 billion of which (excluding the Lloyd's market) are to be borne by reinsurers. According to Apref ⁽¹⁾, the final bill of the current health crisis should be estimated between 50 and 70 billion USD.

⁽¹⁾ Apref: Association of Reinsurance Professionals in France

Cyber-attacks, feared risks

While cyber attacks [8] are multiplying, the coverage of this type of risk remains underdeveloped and inadequate. Reinsurers are, in fact, more and more wary of events of a systemic nature. A large-scale attack can paralyze the entire planet and cost the insurance industry dearly. According to Standard & Poor's [9], malicious attacks cause more than 700 billion USD in losses per year to companies, while insured damages represent only 5 billion USD, that is less than 1% of the total losses.

Despite these fears, cyber-insurance represents a growth vector for the market. This activity could lead to:

• an average premium increase of 20 to 30% per year,
• a continuous adjustment of rates,
• a growing demand for coverage that far exceeds supply especially since the switch to all-digital systems for many businesses, government agencies and organizations,
• an increase in claims in terms of frequency and severity.

The current rise in cyber threats is driving a steady increase in pricing. At the primary market level and depending on underwriting conditions and regions, premium rate adjustments are likely to reach 100%. This increase feeds the financial availability of insurers and reinsurers who do not have sufficient funds to take on such risks.

Another approach to cybercrime [10] pushed some insurers to reduce their risk exposure, a move sometimes used as a response to the rise in piracy and the increase in claims related to ransomware. Just like AXA, which in May 2021 suspended its "cyber ransomware" option, other more radical measures can also be considered.