Reinsurance News

Pricing must remain favourable to outstrip inflation: Gallagher Re

29th March 2022 - Author: Matt Sheehan

Analysts at reinsurance broker Gallagher Re have contended that pricing and terms need to remain favourable in order for re/insurers to maintain or grow margins in 2022 and 2023.

Reflecting on recent conference calls, the broker noted that inflation remains one of the most widely discussed themes among senior executives.

Last year, claims levels were significantly affected by higher material and repair costs, largely impacting short-tail lines, it reported.

This included higher property re- build costs due to a rise in the cost of lumber and certain other commodities, and higher motor repair costs, partly due to a rise in used vehicle prices.

However, in 2021 the earning through of price increases was able to outstrip claims inflation, as evidenced by the improvement in attritional loss ratios.

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But to keep this balance going forward, pricing and terms must remain favourable, Gallagher Re warned.

“Analysts, regulators, and rating agencies will continue to monitor inflation trends carefully, particularly on liability lines, given how severely impacted (re)insurers have been during previous periods of sustained high inflation,” analysts said.

“To date we have not seen widespread adverse reserve development for liability lines, although pockets of strengthening continue to be reported.”

Gallagher Re also looked at the impact of inflation on the asset side of re/insurers’ balance sheet, as the recent uptick in bond yields has allowed insurers to invest at higher new money yields.

It suggests this trend will show up in results with a lag, as insurers are still sitting on older bonds with lower coupons.

Nevertheless, this up-tick in new money yields was a small source of upgrades for 2022 and 2023 earnings forecasts coming out of the Q4 reporting season.

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