As reinsurance capacity retreats and inflation soars, insurers must be prepared to retain more risk - Swiss Re

We are in a new, more volatile reality and this requires a rethink about reinsurance structures and the cost of cover.

This is according to Frank Reichelt, the head of Northern, Central & Eastern Europe at Swiss Re, speaking at a virtual press briefing in advance of next weeks’ Baden-Baden reinsurance meetings in Germany.

“The world is in a crisis,” said Frank Reichelt. “The geopolitical situation is adding further fuel to existing inflationary pressures and supply chain disruptions.”

Nikhil da Victoria Lobo, head Western & Southern Europe, said the industry as a whole had to step up in a world facing a more volatile risk landscape. “The old recipes do not work. The risk is high if we do not innovate.”

“The industry is allowed to price risk and set rates to reflect the changing and more volatile reality, with substantial decision-making at local levels,” he added.

There is a role for governments. “There is an opportunity for public and private sectors to collaborate and use their joint knowledge and capital to make society more resilient.”

Risks must be shared

As cedants, brokers and reinsurers prepare to gather in Baden Baden, there is a high degree of uncertainty. Reichelt said Swiss Re would consider the individual situation of each client on its own merit.

The combined impact of inflation and extreme weather losses is driving increased demand for cover at a time when capacity has been withdrawn from the market.

“Reinsurance plays a significant role in being a final backstop for the industry,” said Reichelt. “But we need to be compensated for inflation as risks accumulate.”

Cedant retentions have remained relatively static for a decade and this is a situation that must change dramatically, insisted the reinsurance executives.

“As risks increase with inflation we need to ensure they are shared through various reinsurance structures,” said Reichelt. “Client retentions need to be addressed so that reinsurance can continue to address real volatility.”

Rates to harden

da Victoria Lobo noted that inflation was compounding property exposures as it flows through to client valuations. 

”Insurance companies need to buy more reinsurance because they have a much larger exposure of aggregate values,” he said.

It is not just about reinsurance, he added, pointing out that underinsurance and protection gaps in the underlying market are very real consequences if the impact of inflation is not captured.

It is inevitable that reinsurance rates will harden at 1 January due to supply and demand imbalances, thought da Victoria Lobo. 

While other reinsurers have pulled back from the property catastrophe market, he emphasised Swiss Re was a stable and committed partner with the risk appetite and capacity to support clients.

Recession inevitable

Reichelt said 2022 was a transition year as we move towards recession, which he anticipates will arrive in the Eurozone in the next 18 months, as the energy crisis deepens.

Germany is particularly exposed, given its dependency on Russian gas to power the country’s manufacturing base. While government fiscal support will lessen the impact of the economic crisis, it is not something that can be avoided, he warned.

The country is currently experiencing the highest rates of inflation since 1951, with energy the main driver with prices rising by 40%. The food price index has also entered double digits, with consumers seeing increases of 11.8% overall. 

“This leaves consumers with less money to spend on other things,” said Reichelt.