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Reinsurance capital at ‘record levels’, but inflation remains a ‘dark cloud’: APCIA panel

DSC_9452 APCIA reinsurance panel.JPG

While Inflationary pressures introduce volatility, the reinsurance industry is attracting unprecedented levels of capital from financial institutions, according to executives speaking on a reinsurance industry panel.

Joe Monaghan, global growth leader for Aon Reinsurance Solutions and CEO of the Aon Public Partnership – speaking on a panel at the APCIA Annual Meeting in Denver, Colorado – said: “The industry is at record levels of capital. There has never been more institutional interest from pension funds, private equity and hedge funds in our business because they're looking for ways to grow as well.

“At the same time, there are significant challenges on getting the returns equity-based reinsurers want."

Alex van Dijk, Guy Carpenter’s president for US branches, said he was “very optimistic” capital would continue to flow into the reinsurance industry.

“If there is a dark cloud, it’s inflation in a low-rate environment,” he said. “Most of our clients are keeping up with loss-cost. If inflation goes above loss costs, then that puts us lower on capital being interested in entering our industry.”

While panelists agreed inflation was a topical concern for reinsurers, Chirag Shah, executive vice president and head of casualty at Willis Re, pointed out that inflation was “nothing new” for the industry.

“Without a shadow of doubt, inflation is impacting property lines as well as casualty lines,” Shah said.

“We've been dealing with inflation from a loss-trend perspective for the last decade, and the issue right now is what this level of economic inflation is that may or may not manifest itself. What layer of additional risk does this add to the product, to the policy, to the reinsurance transaction?"

Shah said the industry would now be in a “heightened” period of uncertainty, and that both clients and reinsurance partners would have to evaluate the secondary effects of economic inflation, which could add more risk.

“What it ultimately does is introduce volatility, but volatility isn't necessarily a bad thing,” Shah said. “This is exactly what we're in the business of absorbing as insurance and reinsurance carriers and partners.”

To mitigate potential volatility stemming from inflationary pressures, Shah emphasized the importance of communicating risks to policyholders and then translating them to the reinsurance committee.

“It's all about communication and making sure everyone understands what the risks are here,” he said.

Social inflation also remains top of mind, the panelists agreed, as rulings increasingly demand insurers pay hefty court awards.

“We need to control the litigation environment,” Van Dijk said. “That's an ongoing battle that extends beyond property, but also on the liability side. The fees are outrageous, and then we will want to try to protect the consumer, but the consumer is not being protected.”

Shah added: “It’s not necessarily benefiting the consumer, it's benefiting the lawyers. The lawyers and the PE funds are buying financing and litigation.”

Marcus Winter, president and CEO of Munich Re’s US reinsurance division, said the industry’s “big task” in this environment was to find the right capacities for the right structures.

“When I look at many companies that say we want to buy 10% more capacity this year because of inflation, even on the property side, social inflation, legislation around roofs – the question is, where do we get that capacity from? And how do we make sure the growth and capacity that is necessary is matched by additional funds that flow into the range?”

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