Swiss Re sees significant increase in demand for reinsurance protection

Leaders at reinsurance giant Swiss Re continue to see strong and rising demand for reinsurance protection across all lines and regions on the back of the current high inflationary environment.

This morning, Swiss Re hosted a media briefing ahead of the 2022 meeting of the reinsurance industry in Baden-Baden, a key event for players as the market turns its attention to the important January 1st, 2023, renewals.

To start, Frank Reichelt, Head Northern, Central & Eastern Europe, discussed some of the main topics which he expects to be on the agenda at this year’s meeting.

“We see significant increase in demand for risk protection in the current uncertain times, across all our businesses and in all regions,” said Reichelt. “As inflation flows through the clients’ exposure valuation, we expect to see significant new demand for capacity.”

At the same time, he continued, Swiss Re sees that, in certain areas, notably natural catastrophe, reinsurance capacity is actually shrinking as providers reduce their appetite, a trend that Reichelt feels will likely have an impact on prices.

“Insurers can mitigate the downside risks of the economic situation and support their clients in their capital management, repricing insurance risks to account for higher claims cost, asset reallocation in investment portfolios, and hedging against inflation,” he continued.

With the world only getting riskier, Reichelt stressed that the traditional role of reinsurance as the financial backstop to the industry, will likely continue. However, “reinsurers and insurers need to be compensated for inflation.” Further, as risks accumulate, insurance premiums are poised to increase to reflect the new, more volatile reality.

“In fact, the fundamental idea of our industry is that insurers and reinsurers share the risk. As risks increase with inflation, we also need to ensure that the increased risks are shared between reinsurers and insurers, and you can do that by various reinsurance structures. During recent years, client retention has not kept up with loss inflation. This needs to be addressed to ensure that reinsurance addresses real volatility and isn’t just absorbing risk trends,” said Reichelt.

“So, the structure of reinsurance covers need to evolve with inflation, and the retentions of insurers will need to go up. One area that illustrates these dynamics very clearly is the nat cat situation in Europe,” he added.

According to Reichelt, most of Swiss Re’s clients are “considering buying additional nat cat capacity for next year.”

He explained that this is being driven by a myriad of forces including inflation, the loss experience, an improved understanding of secondary perils, and also Solvency II considerations.

“If we look at Germany, from our recent discussions with a lot of clients in this market, we have noted plans to buy about €2 billion to €2.5 billion more cover for nat cat for 2023,” said Reichelt.

Reichelt was joined by numerous other leaders at Swiss Re, including Nikhil da Victoria Lobo, Head Western & Southern Europe, who expanded on the impact of the current inflationary landscape.

“If we do not capture this inflation in our risk evaluation, actually what we’re doing is underinsuring people,” he said. “So, the need to capture inflation in something like property values, but it extends to all lines, is also about keeping the protection gap closed or closing it further.”

Victoria Lobo also noted that this is driving more demand from clients for additional reinsurance protection. And as increasing demand collides with shrinking supply as some retreat from the market, he feels it is inevitable that rates will harden further.

“I would also like to end that, in these moments of challenge, we at Swiss Re believe that our industry has the potential to step up,” concluded Victoria Lobo.