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Inflation a key starting point at 1/1 amid elevated risk environment: Aon panel

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With the important January 1st, 2023, reinsurance renewals fast approaching, executives from some of the world’s largest reinsurers have highlighted inflation as a key starting point, and stressed the need to get paid for the elevated risk environment.

Earlier today, Andy Marcell, Chief Executive Officer (CEO) of Aon Reinsurance Solutions, moderated a panel focused on the 2023 renewals.

Speakers included: Mike Mitchell, Head P&S Underwriting Reinsurance, Swiss Re; Jacques Bonneau, President and CEO of PartnerRe; Stefan Golling, Member of the Board of Management of Munich Re; and Dr. Michael Pickel, Member of the Executive Board – Property & Casualty, Hannover Re.

The insightful discussion covered a range of topics and challenges facing sellers and buyers of protection ahead of the 2023 reinsurance renewals.

According to Mitchell, when thinking about the macroeconomic landscape, the most important thing on Swiss Re’s mind at the moment is inflation, which he explained is most pertinent to the reinsurance proposition, notably excess of loss structures.

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“So, probably the most important starting point for us is to think about how we project forward the inflationary expectations. How we match those up with both geographical and product drivers to try and work out what the impact should be, in terms of how we’re estimating future loss potential as we look forward to renewals, where the average loss will probably only be paid nine to 12 months out from now are pieces of business that we’re looking at.

“So, that’s a really, really complicated starting point, and I think that’s the baseline for everything else,” said Mitchell.

Hannover Re’s Dr. Pickel agrees, saying that it’s a very complex picture that the industry has to try and get its hands around.

“I think what it really brings to the table is that we have to understand our clients and to see how they approach inflation and what they are doing with their risk profile. And, I think, this is the main challenge for this renewal, to slice and dice the business and what could be in property lines adequate, maybe is a danger to credit and surety business due to default risks, which are increasing,” he said .

“And, we have to select as well the inflation properly because it’s a very broad issue when it comes to property lines and liability lines, and to motor business which is written on an index basis,” added Dr. Pickles.

Bonneau of Bermuda-based PartnerRe underlined that risk levels, both real and perceived, are elevated on an absolute basis and year-over-year.

“You’ve got geopolitical tension with Russia / Ukraine, Russia / Europe, and perhaps the rest of the world. You’ve got China / Taiwan. I think you’re going to see some civil commotion just because of rising food prices and energy prices that are ongoing,” said Bonneau.

Adding: “I think what we’re looking at is the industry is going to be looking for continued pricing increases above inflation. We’re going to be looking to try and diversify our portfolio in order to manage the volatility that we’re being faced with. We’re going to be looking, I think, at limit management and our market share. And, clearly, a real focus on wording in that.

“We’re open to accept the risk, but I think it’s one of those things where the risk is elevated and with that comes a need to get paid for that.”

It’s clear that insurers and reinsurers are operating in a particularly challenging environment, but as noted by Munich Re’s Golling, it’s the industry’s job to deal with that volatility.

“I think what’s different this year, and maybe that also sets a bit the tone, what’s different is in the past years we have mainly faced the challenges on the liability side of the balance sheets, and weak maybe underwriting profits could be balanced by investment returns,” said Golling. “This year, we have clearly seen by the geopolitical and macroeconomic challenges, we also face some problems on the asset side.

“So, really, as an industry, we need to come back both on the primary insurance side as well as on the reinsurance side to come up with technical profits.”

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