With the world’s economies grappling with inflation, higher rates and a developing cost-of-living crisis, property insurance and as a result reinsurance claims are set to be one of the area’s of the market most affected, Swiss Re has said.
In a new sigma report, global reinsurance firm Swiss Re highlights that the insurance market is still on-track to surpass $7 trillion of premiums by the end of this year.
That pace may have slowed slightly, given the economic environment, which leads Swiss Re to describe the near-term as potentially “transition years,” as the insurance and reinsurance market “navigates the economic realities of high inflation and low growth.”
Swiss Re’s new sigma explores the economic environment and what that means for insurance premium growth.
Jerome Haegeli, Swiss Re’s Group Chief Economist commented, “Even in the face of a challenging economic environment, insurance remains a vibrant, resilient and growing industry – and reaching the USD 7 trillion mark for global premiums is a major milestone. However, these are not easy times, and the insurance industry will need to keep a close eye on inflation.”
The effects of a sharply slowing global economy and multi-decade-high inflation are set to weigh on total premium growth, Swiss Re believes, as it forecasts a below-trend 1.2% annual average growth in real terms over the coming two years.
Claims and the cost of them, as well as the potential for catastrophe losses to be higher than previous experience may have implied, is a factor the insurance, reinsurance and indeed insurance-linked securities (ILS) industry will need to keep an eye on.
The positive side of this is that claims inflation will help rate hardening to persist, Swiss Re said, which could restore underwriting profitability and support premium growth in 2023, perhaps beyond.
Non-life insurance premiums are expected to rise by 7.1% in nominal terms in 2022, amounting to USD 4.1 trillion globally by the end of the year. Accounting for inflation though, this is only 0.8% growth.
For 2023, Swiss Re forecasts stronger premium growth of 2.2% in real terms, largely thanks to the ongoing rate hardening, while commercial lines growth is expected to be stronger than personal lines.
Haegeli commented on the impact of inflationary effects on claims, “As the world gets more expensive, so do the costs of accidents and natural catastrophes – and this makes claims more expensive. However, there is a silver lining, as central banks take action to combat inflation, higher interest rates will support insurers’ profitability in the medium term.”
Swiss Re said that, “The impact of high inflation will show in rising claims in non-life,” with both the property line of business and motor expected to be where this manifests first and fastest.
“In construction, supply disruptions and labour shortages have led to an increase in repair and rebuilding costs, and in turn higher claims,” the reinsurance firm said.
Pricing is likely to keep rising in commercial property as insurers seek to offset rising inflationary effects, Swiss Re believes, which may also go some way to supporting the chance that property reinsurance rates also continue to feel some upwards pressure from inflation as well.
The reinsurer expanded, saying, “In the construction sector, supply disruptions related to raw materials and labour shortages are putting near-term upward pressure on property claims. For example, in Germany, we expect the construction price index (PPI-C) for non-residential commercial buildings to average around 18% this year. This will lead to an increase in repair and rebuilding costs, which in turn will likely show in higher claims.”
What does this mean for catastrophe claims? Well the prospects are that industry loss costs from major property catastrophe events that strike the insurance and reinsurance industry could be much higher than anticipated.
For example, a catastrophe that occurred just a few years ago could cost the industry much more, which makes it absolutely vital that reinsurers and ILS funds are pricing for the effects of inflation and ensuring their rates are sufficient to cover expected loss costs.
Of course, there are also potential ramifications for instruments such as catastrophe bonds, or industry-loss warranties (ILW’s), as these too need to factor inflationary effects into their pricing and older vintage multi-year deals may not have incorporated it quite as well as a fresh issuance today would be able to.
Something else for ILS fund managers to keep an eye on this storm season.