Executives at reinsurance giant Swiss Re continue to see strong and growing demand for reinsurance protection across lines of business and geographies in the current environment of high inflation.
This morning, Swiss Re held a media briefing ahead of the Reinsurance Industry Gathering 2022 in Baden-Baden, a key event for stakeholders as the market turns its attention to the important renewals on 1 January 2023.
To start off, Frank Reichelt, Head Northern, Central & Eastern Europe, spoke about some of the main topics that he believes will be on the agenda of this year’s meeting.
“In the current uncertain times, we see a significant increase in demand for risk protection in all our business areas and in all regions,” said Reichelt. “As inflation flows through customer risk assessments, we anticipate significant new capacity demand.”
At the same time, he continued, Swiss Re is seeing that in certain areas, particularly natural catastrophes, reinsurance capacity is actually shrinking as providers reduce their appetites, a trend Reichelt believes is likely to impact prices.
“Insurers can mitigate the downside risks of the economy and help their clients manage their capital, reprice insurance risks to reflect higher claims costs, reallocate assets into investment portfolios and hedge against inflation,” he continued.
As the world becomes riskier, Reichelt stressed that reinsurance’s traditional role as the financial backbone of the industry is likely to continue. “However, reinsurers and insurers need to be compensated for inflation.” As risks accumulate, insurance premiums will also rise to reflect the new, more volatile reality.
“In fact, the basic idea of our industry is that insurers and reinsurers share the risk. As risks increase with inflation, we also need to ensure that the increased risks are shared between reinsurers and insurers, and you can do that through different reinsurance structures. In recent years, customer retention has not kept pace with loss inflation. This needs to be addressed to ensure reinsurance responds to real volatility and not just absorbs risk trends,” Reichelt said.
“So the structure of reinsurance coverage has to evolve with inflation and insurers’ retentions have to increase. One area that makes this dynamic very clear is the nat cat situation in Europe,” he added.
According to Reichelt, most of Swiss Re’s customers are “considering purchasing additional nat cat capacity for the next year”.
He explained that this is being driven by a variety of forces, including inflation, claims experience, an improved understanding of secondary risks and also Solvency II considerations.
“Looking at Germany, in our recent discussions with many customers in that market, we have identified plans to buy approximately €2 billion to €2.5 billion more coverage for Nat Cat for 2023,” Reichelt said.
Reichelt was joined by a number of other senior executives at Swiss Re, including Nikhil da Victoria Lobo, Head Western & Southern Europe, who outlined the implications of the current inflationary landscape.
“If we don’t factor that inflation into our risk assessment, we’re actually underinsuring people,” he said. “The need to capture inflation in something like real estate values, but it extends across all sectors, is also about keeping the protection gap closed or further closing it.”
Victoria Lobo also noted that this increases client demand for additional reinsurance protection. And as rising demand collides with shrinking supply as some pull out of the market, he thinks it’s inevitable that interest rates will continue to tighten.
“I would also like to finish by saying that in these challenging moments at Swiss Re we believe that our industry has the potential to improve,” concluded Victoria Lobo.