Ukraine war and cat losses put reserve adequacy 'at risk'

The war in Ukraine, inflation and higher natural catastrophe losses are threatening the adequacy of non-life insurers’ reserves, Swiss Re has warned.

While companies have generally built up a “solid buffer” of reserves for as-yet unreported claims, the reinsurance giant said recent systemic shocks are pushing up claims costs and “raising questions about [reserve] adequacy”.

“Higher uncertainty over coming claims suggests that reserves are at risk of being insufficient despite the large current buffer,” economists at Swiss Re said. 

Direct non-life insurers in advanced markets have on average released prior-year loss reserves, but the pace has slowed over the past few years, driven by motor and general liability in the US and UK, Swiss Re’s analysis showed.

The recent Covid-19 pandemic, the war in Ukraine and inflation shocks are pushing claims higher and insurers have increased the share of incurred-but-not-reported (IBNR) claims in response.

“The inflation shock has interacted with other events of recent years to increase the magnitude and variability of loss reserves,” the Swiss Re economists said. “On balance, we see higher uncertainty around loss reserves estimates, with downside risks to adequacy.

While Covid-19 claims estimates have come down from initial calls of up to $100bn to around half that amount, there is still uncertainty as the ultimate result of many related court cases remains unknown, the economists noted.  

'The inflation shock has interacted with other events of recent years to increase the magnitude and variability of loss reserves'

^{Swiss Re}

The war in Ukraine has also added to reserve risk, as losses remain highly uncertain in lines that include aviation, political risk, cyber and directors’ and officers’ insurance, they said. 

In addition, high natural catastrophe losses are also creating uncertainty, the economists said. The potential for more supply chain issues and shortages has made it harder to predict claims cost increases from a demand surge after a large natural disaster, they added.  

“Despite current high reserve buffers, the pressures from recent systemic shocks and elevated inflation create more uncertainty, and we believe there is a higher probability that adequacy may weaken,” the Swiss Re economists said.

“This risk, and uncertainty over legacy business, could limit insurers’ capacity available for new business and require more premium to cover. This could extend or exacerbate the current hard market conditions in non-life insurance,” they added. 

Swiss Re’s warning over reserve adequacy comes as the UK’s Prudential Regulation Authority has warned of a “significant risk” that reserves will need to be strengthened in the coming years as claims inflation has been underestimated. 

A thematic review of the impact of claims inflation by the regulator revealed many firms may be failing to strengthen reserves sufficiently in response to claims inflation.