Analysts at reinsurance broker Gallagher Re have argued that market adjustments to ensure solvency for the re/insurance industry will be “inevitable” as the market looks to balance the continued effects of inflation, social inflation, elevated supply costs, and other variables.
In its 2022 Natural Catastrophe report, Gallagher Re notes that nat cat losses have shown consistent annual growth in recent decades, with 2022 marking the fifth out of the last six years that insured losses exceeded $100 billion.
This is largely due to significant population and exposure growth in highly vulnerable regions around the world.
But analysts also suggest that nflation and social inflation are notable factors adding to these increased natural disaster costs, and are now driving a non-negligible portion of catastrophe losses annually.
Many factors combined last year to drive some of the highest inflation in decades for most regions of the globe, including the residual impacts of COVID-19, supply chain disruption and energy implications from the conflict in Ukraine.
Another contributing factor of global inflation has been the multiyear rise in home and property values, which, combined with elevated prices for construction materials and other commodities, means the cost to repair or replace a home is much greater than it was even five years ago.
Gallagher Re notes that government financial entities around the world raised interest rates in an effort to cool this growth, but suggests that these actions did little reduce the impact to insurers, who have in many cases seen a double-digit increase to insurance claims.
Similar issues surround the automotive market, where part shortages not only resulted in a backlog of new car orders, but huge spikes in the global average cost of used vehicles.
And for reinsurers, there have been elevated costs associated with access to capital, which in turn fuelled one of the hardest contract renewal cycles on January 1, 2023, in many years.
“The cyclical nature of a hard reinsurance market due to more expensive and higher-volume claims payouts from natural disasters, geopolitical tensions, inflation, etc., means that premiums at the policyholder level also faced a price re-evaluation to ensure insurance carrier solvency and the health of the broader market,” Gallagher Re explained.
At the same time, the acceleration of nat cat loss costs can also be attributed to the concept of social inflation, which includes the rise of claims costs for reasons beyond general inflationary parameters, such as claims litigation and other liability issues.
Gallagher Re highlights that these factors have taken on enhanced influence in recent years, often due to fraudulent claims filings, which has greatly added to final claims values.
“The challenge is how the reinsurance industry balances the continued effects of inflation, social inflation, elevated supply costs, and other variables today and in the future,” the broker reported.
“The risks and costs associated with litigation and liability will only become more pronounced if more steps are not taken to add more protections for the industry and its consumers,” it warned.
“There will inevitably be new variables that test how we handle the increased cost of natural catastrophes. Inflation is the biggest challenge today. How we implement our lessons learned from today’s environment will be critical to how we handle the next hurdle tomorrow.”