How to manage inflation at the renewal

Inflation, and how insurers are working to tackle it, is already the number one topic of conversation between insurers, their brokers, and reinsurers.

Without doubt, ceding companies will need to demonstrate during the coming renewal that they have a handle on the total insured values (TIVs) within their reinsured portfolios. They will need to outline a credible strategy to deal with it. With inflation touching double digits in some jurisdictions, TIVs can be a moving target, but the vital message cedants will have to deliver is that they’re on top of it.

Casualty carriers have a recent history of dealing with the lingering issue of social inflation, and therefore have well-established tools to cope. But inflation on the property side is a relatively new challenge. Macroeconomic factors are changing the landscape.

Liberty Mutual Reinsurance has adopted several strategies to deal with the inflationary issues affecting property portfolios. Their deployment varies by geographical market, but first among them, and useful everywhere, is awareness-building.

Uncertainty over rising TIVs is a market-wide issue. Several third-party vendors provide tools to assess valuations, particularly for exposures in the US. Cedants’ use of these technologies gives us a good level of underlying comfort that insurers are getting their arms around the problem.

Our centralised analytics team has been looking closely at our own data to assess how exposures have changed over the past five years, and to make forecasts about regional directions and velocities of travel. We compare those findings to reported broader trends, and to the market’s view. From there, we form our own judgement of inflation and its impacts.

Partnerships work

Sometimes no historical data or external tools are available to support our analyses, particularly for exposures in developing markets and new business. In those cases, we adopt a partnership approach. We talk intensively with insurers and their brokers to explore what they’re experiencing, and how they are reacting. We then incorporate those findings with our own modelled perspective to come up with a well-considered view of inflation risk.

As part of the Liberty Mutual Group, we are working hard to understand the inflationary pressures on our portfolio. We’ve divided rising claims costs into components and created strategies to address them.

Insurers can choose from an array of strategies ranging from blanket rate increases to active portfolio adjustments or revaluations. Whatever the approach, as a reinsurer, we want to be satisfied that the chosen method is realistic and workable. We want to see that insurers understand how their TIV could move during the coverage year—keeping in mind that for many carriers, the numbers to hand may already be about three years old.

In a perfect world, we would be able to value each insured building or reinsured portfolio in real time, regardless of the occupancy type. That’s not realistic today, but we work with property indices for many exposures. They are an improvement over a simple annual estimate of value, or the blunt instrument of a fixed-percentage rise. One long-term aim for the insurance industry could be to value every building on their books in this way, something that a handful of insurers have already accomplished.

We don’t expect every client to deploy TIV analysis technology during renewals, but we need to be comfortable that the reported values are as accurate as possible in the current inflationary environment.