22 February 2023 

Written by Marisa Grundling - Acting Head of Department: Risk and Insurance 

The impact of inflation on reinsurance  

The whole world has been bombarded with rising inflation over the last year. The figures that we see on our news channels is the percentage increase of goods, in correlation with the figures shown the same month, a year before.  

Inflation is usually reported over a wide range of products, but we will have to focus on the inflation that has an impact on insurance, like the cost of vehicles, parts and goods, the cost of building materials, labour and liability payouts awarded by courts.  

Entering a hard market 

I remember when I studied reinsurance, it was noted that reinsurance premiums do not have an influence on the premium to the consumer. We see this phenomenon rapidly changing, partly due to the ever-increasing inflation that we are experiencing. This is also echoed by Michael Giusti, where he notes that reinsurance will play a bigger role in the cost of nearly every policy in the near to medium-term.  

The reinsurance market has reached the pinnacle in 2023, by entering a hard market. We saw this in the property and specialty lines January renewals, with some increases of up to 60%. This hard market is evident in the high demand for reinsurance but low appetite by reinsurers.  

Various stakeholders in the reinsurance industry have similar concerns surrounding the increased cost of operations that have arisen, especially with the renewal discussions of treaties already in place. Insurers can, however, offset the risk of major premium increases by providing evidence that their underwriting takes inflation into account, through their sum insured limits and deductible structures, according to James Kent of Gallagher Re.  

Clauses in treaties 

The higher costs of claims for both the reinsurers and the insurers are not the only problem that we are faced with due to high inflation, this is also directly correlated to the interest rate which impacts the cost of capital that is required. The overall reinsurance capital went down in the first part of 2022, which led to a mismatch in supply and demand, according to The Insurer. On the bright side, should insurers and reinsurers have investments, the higher interest rates will, in turn, give a good return on investment.  

Reinsurers are clamping down on their underwriting policies, especially with regards to clauses in treaties. At the forefront in non-proportional reinsurance is the Stability Index Clause, specifically for Working Excess of Loss treaties that underwrite long-tail policies like liability insurance. Treaties without this clause could incur higher premiums to offset the risk to the reinsurer. This clause shares the burden of inflation, should a claim take longer to finalise and is inflated due to the time taken. If this clause is not in place, the deductible to the insurer will remain unchanged, but the reinsurer will have to fund the remaining inflated claim. This clause will lower the insurers recovery, as the layering is adjusted. 

Purchasing power is eroded 

With all the above, it is evident that the years ahead hold slow business growth for both insurers and reinsurers, as purchasing power is eroded by insurers and consumers. This can force more traction across the globe as insurers turn to catastrophe bonds gains, according to Fitch Ratings. 

The solutions, however, are not one size fits all and we will have to dust off our ingenuity and creativity and consider various forms of capacity available in the market like bonds, alternative capital solutions or parametric solutions. 

References:  

Gallagher Re. 2022. https://www.insurancejournal.com/news/international/2022/04/04/661114.htm Online: [Accessed: 16/01/2023] 

Giusti, M. 2022. https://www.propertycasualty360.com/2022/10/20/inflations-impact-on-reinsurance-should-not-be-overlooked/ Online: [Accessed: 16/01/2023] 

Fitch Ratings. 2022. https://www.fitchratings.com/research/insurance/reinsurance-challenged-by-inflation-climate-change-30-08-2022 Online: [Accessed: 16/01/2023] 

The Insurer. 2022. https://www.theinsurer.com/analysis/inflation-driving-increased-demand-for-catastrophe-reinsurance-in-run-up-to-1-1/ Online: [Accessed: 16/01/2023]