Will reinsurers pass rate increases to consumers?

Reinsurers reached a tipping point during their January renewal cycle that saw primary insurers bearing larger-than-usual rate increases.

Which had the industry asking: How much of these reinsurance increases will make their way down to consumers? And do insurers have other options for staying profitable without passing these costs down the chain?

“The primary insurers did manage to have a few years of quite a hard market, some good rate increases in those years,” Stephanie Russell, senior vice president, chief agent and branch manager for TransRe Canada, told the Insurance Institute of Canada’s 2023 GTA Symposium.

“And it’s really up to them whether they want to try to pass any of the additional reinsurance costs on to their policyholders or whether they feel that their price is adequate already,”

Loss history drives rate

Portfolios without a significant loss history saw increases of 25% to 30% on Jan. 1, 2023, while those with losses saw their reinsurance rate increases climb as high as 50% to 70%, Donald Callahan, managing director of Guy Carpenter Canada, said during a Canadian Underwriter webinar, What happened at the January reinsurance renewals?

“There was additional reinsurance cost that the insurers had to bear this year,” Russell said at the symposium. “And [when] we’re talking about whether or not that cost is potentially passed on to the actual policyholder, I think each insurance company is slightly different in how they operate.

“Obviously, they’ve got different products and different product lines and different line guides that they’re writing to.

“So partly, it’s going to be a judgment call on their behalf to say, ‘We used to deploy $50-million limits and [we’re] still comfortable to claim $50-million limits in this line of business, knowing that we’ve got reinsurance.’ Or, ‘Am I going to have to potentially buy some facultative cover, if we want to protect some of it?’”

Risk pricing

But if the risk is adequately priced, and the insured is paying premiums matching their level of risk, the insurer may not need to pass the additional reinsurance cost down to the consumer.

“You may have natural indication that suggests that you’re already at technical rate; do you need to pass on some of the reinsurance cost down through to your policyholders?” Russell posed.

“It’s an open-ended question, and it’s up to the insurance company to obviously look at the product or offering and the [current] rates [they] have been charging.”

When it comes to pricing an insurance product, insurers consider loss ratios, charging the right price for the risk, investment income and reinsurance premium costs.

Products are priced in such a way that, once the technical rate has been established, there is sufficient margin to cover profits, expenses and cost of capital. Since 2018, the Canadian P&C insurance industry’s return on equity (ROE), one financial metric of profitability, has climbed from a meagre 6.4% to around 18% in 2022.

There should be an acceptable profit margin built into the price of the insurance product, Craig Pinnock, chief financial officer at Northbridge Financial Corporation explained during IIC’s GTA Symposium.

“On the question around pricing, I start with the [observation] that all companies try to get the appropriate price for the product at any given point in time,” he said,

But, he noted, that doesn’t always work because the pricing exercise is complex and involves multiple inputs, such as loss or reinsurance costs.