‘Power of inflation’ to drive nat cat price hikes: VIG Re

Inflation and a hardening market could easily drive natural catastrophe prices up 30 percent this year as the market witnesses a “fundamental change” from previous years, according to Johannes Martin Hartmann (pictured), chairman of VIG Re.

“We would say that it’s the power of inflation, and we would consider that on average retentions and limits [where reinsurers/cedants retain more risk] will go up 10 percent, because the assumptions regarding aggregate sum insured and probable maximum losses will have to be revised,” he said.

Cedant risk retention would need to increase “because inflation reduces the value of priorities and deductibles”, the VIG Re chairman told Intelligent Insurer.

In addition to inflation effects, retentions will move up where programmes have seen repetitive losses.

“I have seen a hardening of the retro market, so there is less capacity for some areas. Even if you are not loss-affected, it might easily be possible that you will see price increases of 30 percent on a like-for-like basis just from the effects of inflation and the hardening of the market. That would not be completely out of the box,” Hartmann said.

In terms of cedant retention, he added, in the end it will depend on what actions cedants have taken to mitigate the impacts of inflation on their portfolio. With this in mind, he said, the questions to consider will be: “What actions have you taken to adjust the sum insured, deductibles, or premium rates?” and “How did your portfolio perform in comparison to the market?”

Growth areas

VIG Re is part of VIG Group, the biggest insurer in Austria and Central Eastern Europe. VIG Re is the reinsurance company of the group and has several tasks. One is to buy reinsurance protection on behalf of VIG Group, thereby placing the business from around 50 insurance companies that all cede to VIG Re.

In addition, VIG Re writes a healthy amount of third-party business; it makes up around 40 percent of its gross written premiums and the majority of its retained business.

As part of growth plans, the reinsurer opened two branch offices in recent years, in Frankfurt and Paris. The former looks after Austria, Germany, Switzerland, and the Nordics and the latter covers France, Benelux, Iberia, and the Maghreb countries.

In 2021, VIG Re reported business growth of 19 percent and an all-time-high profit before tax of €26.8 million ($26.9 million), which the reinsurer achieved despite a year of record high nat cat losses.

Looking at 2022 and beyond, Hartmann said he expects “a significant hardening” of the nat cat market.

Over the past few years there has been an abundance of capacity with new capital coming in, so there was a lot of reinsurance supply, mainly driven by the low interest environment, he said.

“Investors were looking for alternative investments and higher returns not correlated to the financial market’s performance, so there was a constant flow of capital going into the reinsurance market.

“But in 2022, the situation is fundamentally changing. There is no longer a massive inflow of capital, interest rates are increasing and not all of the investor’s expectation or returns for reinsurance came true,” he added.

“We see markets that withdrew from reinsurance again because they now see other more attractive ways to invest. So, there is no significant flow of capital there. On the other hand, we see increasing demand. Companies would like to protect to a greater level or better, especially against nat cat.”

Looking at the sector more broadly, Hartmann suggested there may be a “perfect storm” ahead. “Extreme weather events are becoming more frequent, and we all feel the increasing impact of geopolitical crises, such as Russia’s war in Ukraine. We have inflation and we have the increasing threat of recession, so I think there are uneasy times ahead,” he said.

On the industry, Hartmann said that many reinsurers have not earned their cost of capital.

“They are in a difficult situation and hoping that market terms will improve,” he said. “We have to be prepared for a very interesting renewal—there will be tough discussions, probably the most intense ones I’ve seen in 20 years.”