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Higher inflation adds ‘additional layer of risk’: APCIA panel

Reinsurance panel with APCIA logo.jpg

Inflation, catastrophe losses and cyber risk present the most pressing issues the P&C industry must grapple with as it seeks to capitalize on a period of rate rises and robust growth, according to a panel of reinsurance executives speaking at the APCIA’s annual meeting.

“Without a shadow of a doubt, inflation is impacting property lines as well as casualty lines,” Willis Re’s US head of casualty Chirag Shah said.

Increasing loss trends are nothing new, the executive said, as the industry has been dealing with the phenomenon for the past decade, but the recent rate of acceleration has created an additional form of uncertainty.

Shah said both brokers and underwriters now must grapple with determining the “additional layer of risk” imposed by questions around how persistent elevated inflation will prove.

“What this really means is that we're going to be in a heightened period of uncertainty,” he said. "Clients and reinsurance partners need to evaluate the secondary effect of economic inflation, [and] that might just add more potential risk to the policy. Ultimately, it does introduce [more] volatility.”

‘No region has been spared’ from cat activity

Along with inflation, multiple speakers also said that understanding whether the recent cat loss experience is a temporary phenomenon or long-term change is critical.

Alex van Dijk, the president of US branches at Guy Carpenter, noted the spike in cat activity in recent years had been broad-based, explaining that “every region in the US has been impacted”.

He referenced temperatures in Florida at times being colder than Alaska and the unusual nature of flash flooding in New England, as well as continued elevated loss activity from wildfire and severe convective storm. He also noted that four of the highest annual cat loss years had occurred in the past five years.

“So something's going on,” he said. “The big debate is: is it permanent? Is a permanent change going on? Or is [the higher cat activity] a temporary anomaly?” He also pointed out that it isn’t just a US phenomenon; it is also occurring globally.

Aon’s global growth leader, Joe Monaghan, said the challenge for reinsurance buyers and sellers is that “past may not be prologue”.

Monaghan noted that for more than a decade, the absence of landfalling hurricanes had led some reinsurance buyers to question the value of their purchases, whereas in the last several years, recoveries have become much more common.

“If you look at what's happened over the past several years, insurance and reinsurance more broadly, has been incredibly useful.”

“Where do you find that balance in a way that you can actually quantify from year to year basis?” he asked. “How much of this change is permanent? How much of this is anomalous?”

Van Dijk said loss trends accelerating above rate changes is one factor that could jeopardize capital flowing into the industry.

“If inflation goes above loss costs, then that puts us lower on capital being interested in entering our industry,” he said.

The capital sources and individuals who are responsible for managing that are much more savvy and understand the property (re)insurance product better than years past
Chirag Shah, Willis Re

Shah, though, said that the capital that has come into the industry in recent years has been much better informed and disciplined in its approach.

“The capital sources and individuals who are responsible for managing that are much more savvy and understand the property (re)insurance product better than years past,” he said.

Marcus Winter, who took over as the CEO of Munich Re America earlier this year, said that the events of the past year had proven that more margin in the business was needed.

“We need a buffer on top for the uncertainty because at the moment, our insurance and reinsurance product can cover things that are not foreseen at the point of time when we write policies.”

“We need to make sure that the markets are sustainable and can cover those risks long term and not just try to catch up afterwards.”

Cyber solution needed ‘beyond the insurance community’

Executives put the growing threat of cyber risk on roughly equal footing to the threat of inflationary forces, with Willis’s Shah saying that paying ransomware claims has contributed to “moral hazard”.

Part of the challenge, he said, is that insurance companies “don’t know who they’re indemnifying”.

Shah said addressing the challenge of cyber risk goes beyond either raising prices or restricting coverage, arguing it was critical for the industry to upskill itself to keep up with external threats.

“I think it needs to be resolved at a level beyond just the insurance community,” he said. “We're facing an adversary that is [on the] cutting edge – they are very well organized.”

He said the technical acumen of sophisticated hackers had the potential to render underwriters of the product who aren’t on the front lines “obsolete”.

To that end, Shah stressed it was important for the industry to collaborate with third parties, whether modeling firms or other forms of tech providers.

“I think it's going to be a collective of bringing in other industries to help kind of resolve and understand this problem from an underwriting perspective.”

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