Insurers heed inflation warnings

Primary insurers are showing signs that many have adjusted their approach towards their year-end reinsurance renewal, taking heed of warnings that they will need to explain how they plan to manage inflation across their portfolio—before talking pricing and terms.

That is the perspective of Kerri Hamm (pictured), head of business development for Munich Re in the US. “Our clients understand the issues around inflation and, very different from last year, they are coming to the table prepared to talk about how they are addressing inflation in their portfolio,” she told Intelligent Insurer.

Reinsurers and brokers alike have been warning primary carriers that they may face their most challenging renewal journey in decades. To stand the best chance of a deal, they should arrive to the process armed with detailed information of where inflation lurks in their books and how they can protect their portfolio from its effects.

Munich Re had been dismayed in prior year renewal talks that the potential threat of inflation had not gained traction as a topic. That has now changed in 2022.

“Clients have seen the impact on insured values and in losses and now believe that inflation is here to stay rather than transitory,” Hamm said. “There is no way for them to escape the inflation topic.”

In the end, cedants can’t deny the logic that reinsurance remains a pretty good deal against their cost of capital, especially as interest rates rise.

But any alignment in understanding won’t be enough to guarantee an orderly march to a calm and quiet year-end deadline, Hamm warns. The outlook remains “highly uncertain” on the impact from Hurricane Ian and the shake-down to market thinking.

Nor can the revised approach from cedants bridge the gap between dwindling market capacity and rising demand that soars to the impact of inflation on insured values.

For its part, Munich Re won’t budge on its budget for the year-end renewals, Hamm confirmed, and the company has faced the fact that “some tough choices” lie ahead, she said.

Nor will many others be tempted into a market as terms, conditions, structures and pricing increase, she suspects.

“At this point, it does not appear that additional or new capacity will be tempted into the market,” she said. “Insurers may have to make some tough choices.”

Revising attachment points and letting some aggregate structures focus on severity covers are likely moves.