According to a report from Munich Re, inflation is set to remain high in 2023, leading to a bleaker economic outlook for Europe as mixed crises are causing unprecedented levels of complexity in the business environment for re/insurers worldwide.
Thomas Blunck, a Member of the Board of Management, commented, “The outlook both on the economy and on inflation has become bleaker in the past few weeks, especially in Europe.
“That, along with increasing risks from cyber attacks and natural disasters, puts insurers in a difficult and complex situation where financial strength and risk expertise will be what pays off.
“Inflation expectations and changing risks have to be reflected in our pricing for insurance cover. By taking this approach, we can remain a strong partner for our clients and, together with them, support economic resilience.”
Munich Re’s report notes that in response to high inflation, central banks have increased their base rates, which can impact the balance sheets of re/insurers as a result of fixed-interest securities falling in value.
It adds that soaring interest rates can trigger a decline in (re)insurers’ capital bases and affect their capacity, despite higher rates having a positive effect on earnings power in the medium term.
The report also observes that many markets are now seeing inflation rates reach their highest levels in over 40 years.
In Europe, prices are being driven up primarily by energy and food costs. As prices are rising on an increasingly widespread basis, the core inflation rate is also being forced up.
Munich observes that for insurers, the situation is exacerbated by the fact that the inflation rates for key loss components, such as construction costs, are in many cases higher than general inflation.
Additionally, rates in 2023 are still expected to remain above the long-term average, even if inflation does slow. In the eurozone, the expectation is for inflation to remain very high next year, at 5.8% (2022: 7.9%). As for the US, the annual average consumer price inflation for 2023 is anticipated to be around 4.3% (2022: 8.0%).
These factors combined are leading to a gradual increase in demand for reinsurance, says Munich Re, however, reinsurers are seeing their capital bases and, by extension, their capacity decline.
Blunck added, “Munich Re continues to be in a financially strong position, with a solvency ratio that even rose to just over 250% at the end of June 2022. Despite inflation, changing risks, and overall high levels of uncertainty, we stand at the ready with our capacity.
“What is crucial is that we ensure, together with our clients, that all of these developments are adequately covered in the pricing.”
Meanwhile, Munich Re recently agreed to provide backstop capital for a new funding product from OneNexus, which seeks to provide the oil and gas industry with an option to reduce its environmental footprint.
