Analysts at Gallagher Re have suggested a number of changes to the way that insurers utilise reinsurance protection in order to better account for and mitigate the growing challenge of inflation.
In a new report, the broker notes that the debate around inflation has moved on from whether it will spike to how long it will last, with financial markets beginning to price for a prolonged period of high-inflation conditions.
According to Gallagher Re, this could have potential negative impacts for all major classes of non-life insurance, particularly for lines already dealing with challenges due to social inflation.
In response to all these inflationary pressures, investment yields globally have been moving up, but analysts believe that inflation-related impacts on the underwriting result could outstrip any benefits from higher investment yields.
Against this backdrop, Gallagher Re recommended several measures that insurers can take to mitigate their risk from inflationary pressures.
Firstly, should excess inflation remain persistent, then potential for adverse reserve development may be significant for longer-tailed lines of business.
Going forward then, analysts suggest that reserve cover solutions may help manage the potential impact on future earnings, particularly to the extent reinsurance was underutilized in prior periods.
Next the broker, advised that insurers should review how their policies respond to inflation, for example by moving to percentage deductibles could be a way of keeping the deductibles in line for growing sums insured.
Additionally, when evaluating where to set attachment points, especially on casualty treaties, Gallagher Re says insurers should be looking at how future inflation may impact loss severity.
One area to consider in particular is how indexation clauses are used in the treaty, which have largely been overlooked in years with muted inflation, but which could now be triggered, meaning insurers need to model and understand how this may reduce the ability to transfer the inflationary trend into the excess layers.
The historic attachment points on insurers’ excess of loss reinsurance programmes will also impact how geared they are to inflation, analysts added.
A higher attachment will leave more inflation risk with the insurer, so an insurer with higher historic attachment points should consider carefully the potential consequences of higher inflation on their reserves.
Furthermore, on shorter tail treaties, if faced with higher reinsurance prices, insurers were advised to think about ways of reducing the spend through structured solutions, which are especially effective at the bottom end of the programs.
And finally, Gallagher Re suggested that buyers will be at an advantage when negotiating with reinsurers if they can explain in a granular way how they are approaching inflationary risks in their original portfolios.
This can also help prevent ‘double counting’ where reinsurers will add inflation into the insurer’s figures unless they are persuaded that the insurers have adequately addressed inflation in their analysis.