Swiss Re’s Ojeisekhoba: Inflation set to be “number one” renewal discussion topic

Swiss Re’s Moses Ojeisekhoba has said inflation will be the main topic dominating discussions ahead of the 1 January renewal, but that it is just one of several major challenges the industry is facing.

Speaking to The Insurer TV as part of its #ReinsuranceMonth series, Swiss Re’s reinsurance CEO highlighted climate change and the war between Ukraine and Russia as other key topics of discussion – although inflation will be king.

“I think the number one topic will be inflation,” he said. “It will clearly be on everybody’s mind, but the topic of inflation is just one element of an environment that is far more complex from a risk standpoint,” Ojeisekhoba said.

“Climate change [is] another key topic, some of the challenges you see from a macroeconomic standpoint with the war in Ukraine … All of these elements will impact the way risk is seen and the way risk is priced,” he added.

During the interview, Ojeisekhoba said Swiss Re has been spending “lots of time” explaining how it is positioning its own portfolio and how it can help clients navigate the headwinds brought by the continuous spike in inflation this year.

In renewal outlook reports published last week ahead of the industry meet in Monte Carlo, inflation was regularly cited as a point of concern, casting a shadow over some of the more favourable market dynamics such as pricing.

As an example, according to US investment bank Goldman Sachs, inflation in the UK could soar above 22 percent next year if energy prices continue their upward spiral.

A Howden report published last week cited “heightened volatility” as the cause of hardening conditions across several areas of the market, with pressures “particularly acute” across the property catastrophe market.

“Reduced capital inflows and rising inflation, along with a succession of expensive ‘secondary’ peril losses (due in large part to climate change), have strengthened reinsurers’ resolve to demand higher returns … The property-catastrophe market is currently in the eye of a price, risk and supply chain storm,” the report noted.

It also blamed rising commodity prices for the spike in inflation this year, which in turn exacerbated supply chain disruptions.

The report also noted “signs of distress at mid-year renewals”, with the return of inflation adding momentum to the market correction amid higher claims costs and insured values.

Ojeisekhoba explained the complexity of the effects of inflation is higher with existing clients, given that business written earlier this year may have accounted for an inflation forecast that is lower than the current levels.

“We now see those inflation forecasts are higher and when you look at the claims you have to pay you also have to make sure that it reflects today’s real environment, so there it has an impact on the liabilities and on the reserves,” Ojeisekhoba noted.

According to Moody’s, setting reserves for the 2020 and 2021 accident year was a “unique challenge” for P&C (re)insurers because of the coronavirus pandemic. Although claims were lower across some business lines, P&C (re)insurers appear to have set reserves conservatively to address uncertainty around the pandemic.

However, across new business, where the awareness of inflation has grown, it is easier to price for risk taking current levels of inflation into account, said Ojeisekhoba.

“On new business – far easier, because that’s a function of pricing, you [know] what your issues are, you make sure you have the right exposures,” he added.

“More work needs to be done” on cyber

Discussing cyber, Ojeisekhoba commented on areas where the industry still needs to make progress around cyber risk and called for a cyber partnership with governments.

He warned the industry is not yet ready to deal with a worst-case scenario cyber event.

“The (re)insurance sector is doing better at understanding cyber risk, and you see that in the work that’s been done in the last five years – trying to get rid of things like silent cyber cover in underlying policies, putting specific coverages in place and understanding those,” Ojeisekhoba said.

He also mentioned that, even though cyber cat models have continued to improve over time, they are nowhere near the sophistication levels seen across natural catastrophe models.

“Are we, as an industry, in a place and position to deal with a worst-case scenario from a cyber standpoint? Our view is there is still some work to do in this space,” he noted.

But Ojeisekhoba added that the losses from a potential worst-case scenario cyber event could be comparable with a war-type event, and that is something the (re)insurance industry would not want to cover by itself.

This gap in appetite could be addressed by a public-private partnership solution between the sector and governments, where the latter would remove some of the capital burden of the industry carrying such risks on its own.

For Ojeisekhoba, a cyber solution would include involvement from the government to “eliminate” the stress on capital, while the industry would focus on “more attritional related-type losses”.

To support this, Ojeisekhoba said he is already seeing movement in the primary market towards coverage for attritional exposures as well as cyber catastrophe-type exposures with carriers applying caps to ensure that cyber does not become a “true capital-destroying, elimination issue” for the industry.

In this 14-minute interview, Ojeisekhoba provides further colour on: