How global issues impact reinsurance: Guy Carpenter

Repricing risks, using quality data, and seeking alternative solutions are fundamental steps for insurers.

The reinsurance industry's global nature has traditionally provided a buffer against regional risks. However, a confluence of factors, including record catastrophe losses, rising interest rates, geopolitical tensions, and increased climate risk, is exerting pressure on insurers and reinsurers, according to Guy Carpenter.

In their recent report titled “Beginning Of A New Era—Impact Of Global Issues In (Re)Insurance”, there are strategic adjustments Guy Carpenter suggests.

Despite record losses since 2017, non-peak perils are now driving annual aggregate catastrophe losses, challenging insurers. This shift necessitates a reevaluation of risk exposure, especially in catastrophe-prone regions like Australia and Japan.

Escalating interest rates, compounded by negative returns in 2022, affect insurers' fixed-income portfolios. The decline in market values requires a focus on underwriting profit to counterbalance falling investment returns.

The recent spike in the consumer pricing index, driven by supply-chain disruptions from COVID-19 and the Russia-Ukraine war, also adds uncertainty. Social inflation and the economic impacts of increased catastrophe frequency further complicate pricing strategies.

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Whilst unrealised investment losses and limited new capital result in reinsurers deploying capital selectively. Declines in dedicated reinsurance capital require a cautious approach, impacting pricing in the market.

Alarmingly, global property catastrophe pricing rose significantly during January renewals, driven by inflation and interest rates. Decreased retrocession market capacity forces insurers to increase retention, potentially limiting growth opportunities.

The Intergovernmental Panel on Climate Change highlights the link between emissions and increased insurance claims. Insurers must enhance data and modelling capabilities to assess the impact of climate risk scenarios.

With reinsurers tightening capacity and pricing, insurers should explore non-traditional reinsurance instruments to manage volatilities. Whole account quota share and parametric covers offer alternatives to navigate uncertainties. Repricing risks, using quality data, and seeking alternative solutions, such as pooling, are fundamental steps for insurers.

Thus, delivering underwriting books with superior performance enhances bargaining power with reinsurers.