The combined effects of economic and geopolitical crises are driving “virtually unprecedented levels of complexity” in the business environment for insurers and reinsurers, according to Munich Re. High inflation is having an especially profound impact on loss expectancy in many operating segments. Also driving the issue are the changing landscapes for risks like cyber and climate change, and the fallout from the COVID-19 pandemic.
In an effort to combat skyrocketing inflation, central banks have hiked interest rates, which in turn can impact the balance sheets of insurers and reinsurers as a result of fixed-interest securities losing value. Rising interest rates can also initially trigger a decline in re/insurers’ capital bases and affect their capacity, despite higher rates having a positive impact on earnings in the medium term, Munich Re said.
Economic uncertainty is high, with analysts repeatedly forced to revise growth forecasts down and inflation forecasts up. Munich Re’s Economic Research unit currently predicts that the eurozone will slide into recession this winter. Across 2023 as a whole, real-term GDP in the eurozone is expected to stagnate, while a significant economic downturn also looms in the US.
In the short term, inflation is a matter of even greater concern for insurers. Many markets are seeing inflation rates hit their highest level in half a century. An important issue for insurers is that in many cases the inflation rates for key loss components, such as construction costs, are higher than general inflation.
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Even if inflation starts to slow, rates in 2023 are still expected to remain above the long-term average, Munich Re said. In the US, the annual average consumer price inflation for 2023 is projected to be around 4.3%, compared to 2022’s 8%. In the eurozone, inflation is expected to be 5.8%, compared to this year’s 7.9%. Inflation risks are higher in Europe than the US, Munich Re said.
“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,” said Thomas Blunk, a member of Munich Re’s board of management. Blunk was recently tapped to serve as chair of the board’s reinsurance committee effective Jan. 1. Blunk will succeed Dr. Torsten Jeworrek, who will step down from the board on Dec. 31.
“Despite inflation, changing risks, and overall high levels of uncertainty, we stand at the ready with our capacity,” Blunk said. “What is crucial is that we ensure, together with our clients, that all of these developments are adequately covered in the pricing.”
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