Swiss Re CEO Christian Mumenthaler has acknowledged that re/insurers and other financial institutions were “over-optimistic” in the lead up to the current inflationary crisis affecting the world economy.
Speaking to CNBC news from the Davos 2023 World Economic Forum (WEF) event yesterday, Mumenthaler addressed the issue of reinsurance pricing increases coming out of January 1.
He maintained that rate hikes were necessary to account for the impact of claims inflation, but accepted that there may appear to be a “big negative” at the beginning of this process as the knock-on effects of higher pricing ripple through the market.
But with inflation potentially set to be a major issue extending over the next decade, he remained positive that such actions would prove beneficial to the whole market in the long-term.
“Interest rates, as they increase, they go for your investment income and as you reinvest, it moves up and that you cannot take upfront,” Mumenthaler told CNBC.
“So, over the medium term, you’re going to see investment income go up and that’s very positive generally for insurance companies,” he explained, adding: “I think inflation is a more important topic going forward. Not at the levels we have now, but it’s going to be more important.”
In combination with inflation, reinsurance pricing is also having to account for the impacts of climate change, which, along with macroeconomic challenges, is at the forefront of the agenda for the WEF event in Davos.
Mumenthaler noted that the level of losses from natural disasters linked to climate change is “clearly going up” and acknowledged that there is a “certain uncertainty right now” when it comes to ascertaining an appropriate price for perils like floods and wildfires that have proven increasingly volatile.
“This is why some of the capital is quite cautious, to come back in, and there’s a reluctance to deploy capital because we have to adapt, we have to know the new pricing for all of these risks,” he told CNBC.
However, Mumenthaler also went on to affirm his faith in market mechanisms and asserted that capital will return to the market once its profitability is more firmly established.
“One of the important things we do for society is giving pricing signals, specific pricing signals, so if people you know, create houses in floodplains, that’s a bad idea and you can see it in the insurance premium,” he concluded.
“So over the long term, this is good for society, because through these price signals, people will start to build, you know, stronger buildings will build in the right places, etc. But short term, it’s clearly adding to the inflationary pressure. “