Reinsurer panel: Cedants’ data-driven inflationary assumptions key for 1.1 renewal

Discussions around the impact of macroeconomic uncertainties at the upcoming 1 January renewals are centred on inflationary assumptions, according to participants in Aon’s reinsurer panel fireside chat.

The panel was chaired by Andy Marcell, CEO of Aon’s Reinsurance Solutions.

Mike Mitchell, head of property and specialty reinsurance and member of the reinsurance executive committee at Swiss Re, said: ”Probably the most important thing on our mind at the moment is inflation if we think about the macro environment, and that’s one that’s most pertinent to the reinsurance proposition, especially excess-of-loss structures.”

He added that the starting point is to consider how to project forward inflationary expectations and match them up with geographical and product drivers to work out the impacts of estimated future loss potential.

This focus was echoed by PartnerRe president and CEO Jacques Bonneau, who noted that on an absolute basis risk levels – both real and perceived – are elevated.

This includes geopolitical tension, civil commodition from rising energy and food prices, threat of recession and climate change.

“The industry is going to be looking for continued pricing increases above inflation,” Bonneau said on the panel.

“We’re going to be looking to try and diversify our portfolio in order to manage the volatility that we’re being faced with, looking at limit management, our market share and clearly a real focus on wordings.

“So we’re open to accept those risks. But I think it’s one of those things where the risk is elevated and with that comes a need to get paid for that.”

Meanwhile, Stefan Golling, Munich Re management board member for global clients and North America, underlined that it is the reinsurance industry’s job to deal with such volatility.

Having faced challenges on the liability side with social inflation in recent years, Golling said that challenges are now arising on the asset side owing to the geopolitical and macroeconomic environments.

He added there is a broad consensus that a correction is needed to address this.

Data-driven inflationary assumptions

As the conversation turned to cedant disclosure at 1.1, Mitchell said it will be “absolutely critical” to receive a rich data perspective on the inflation topic.

“The expectation for us is now to move beyond that anecdotal perspective and into a more data-driven environment,” he added.

This means cedants must verify information on what they have done in their portfolio, and how successful it has been.

Other questions outlined by Mitchell include: “What are the assumptions that you’re making going forward to your future underwriting? How can we expect that to flow through into the exposure data you’re providing us for the renewal? How do we project that forward into the midpoint of the exposure period for the mix of perils?

“What I’m really encouraged by is when I hear cedants who were able to demonstrate a systematic and periodical reset of inflation assumptions,” added Mitchell.

The need for fact-based responses to avoid conservative assumptions was echoed by both Bonneau and Michael Pickel, chairman of the board of management at Hannover Re.

Pickel added that although there is a good picture of inflation for private line business, there remains uncertainty in industrial and heavy commercial business, particularly in North America and continental Europe.

“We have to get a clearer picture on the renewals of the primary industrial business, particularly in property lines in the engineering sector,” Pickel commented.

Divergence over property cat appetite

Golling also expressed surprise that some reinsurers are altering their property cat appetite, stating that the business must be part of an overall portfolio and – crucially – cannot be based on vendor models.

“This is meant to be a core of our overall product offering and underwriting,” he said, emphasising the need to get structures and retention levels right.

Back in June, Aon’s Reinsurance Market Dynamics Report said that property reinsurance “may be fast approaching a true ‘hard’ market” owing to capacity constraints and rising demand.

The “near-perfect storm” of inflation, economic and financial markets uncertainty, and climate change will put insurer capital under increasing pressure, just as reinsurers retrench, the report said.

Aon’s report concluded that both attracting new sources of capital to the market and data-led portfolio differentiation will be essential to meeting insurers’ reinsurance needs as the industry approaches the renewals.