Inflation and reinsurance costs put squeeze on European insurers

Non-life insurer profits in Europe will come under increasing pressure from inflation and higher reinsurance costs, warn insurance analysts at DBRS Morningstar. The better news for customers is European non-life insurers may find it difficult to pass on higher reinsurance premiums and costs from claims inflation to struggling customers through rate increases, they said during a webinar yesterday. Rising inflation is expected to have a moderate to significant impact on non-life claims, according to DBRS Morningstar. Inflation in the eurozone during August was just over 9%, its highest on record. Inflation is now in double digits in the Netherlands, Belgium, Spain and Greece, and 20% in the Baltics. According to DBRS Morningstar insurance analyst Adriana Alvarado, inflation is likely to rise further, despite some signs that supply-side pressure is easing. Inflationary pressures are starting to widen beyond the main drivers of energy and food prices, with prices for goods and services now starting to rise, she said. “The expectation is that inflation will continue to rise for some time, but no one knows for how long. It will depend on developments in the energy markets in terms of gas supply and demand, and the impact on gas prices,” said Alvarado. “On the one hand, we have seen global supply pressure easing, some commodity prices come down and some transportation costs moderate. But on the other hand, the energy crisis in Europe is not going away, and the costs of goods and services are rising. So, we see inflationary pressures building up there as well,” she said. Inflation will feed through to increased claims costs for insurers across all lines of business, according to Patrick Douville, analyst at DBRS Morningstar. However, non-life insurers in Europe may not be able to pass these on to policyholders, which are struggling with the higher cost of living and rocketing energy prices, he said. “The key question in terms of earnings and performance going forward is going to be whether [insurers] are able to pass through higher claims and inflation to their policyholders. Given the fact that some policyholders are struggling in Europe, that might be a challenge, especially in the more competitive markets for non-life insurers,” he said. Inflationary pressures are coinciding with changes in the reinsurance market, where rate increases have lagged those in the primary space. But higher natural catastrophe losses are now driving reinsurance price increases. “As much as we have seen direct writers perform better than reinsurers, this might ultimately reverse. In the hard market for premium, reinsurers are raising premiums big time because they are underperforming and they are getting more cautious, and capital is getting more cautious in that market,” said Douville. “For direct writers, if consumers are squeezed, which they are with energy prices and inflation in the euro area, and the economic slowdown that comes with that, it will be a big challenge for direct writers of non-life insurance to pass through fully their inflation costs to policyholders. We might see that premiums go up but they might not go up as much as some of these costs,” he said. Reinsurance costs are now rising above inflation and are likely to mount further, according to Douville. “On the reinsurance side, my expectations are that premiums will go up significantly. Reinsurance premiums have gone up year on year and above inflation rates. Inflation and higher costs add to different hits that the reinsurance industry has been taking, from higher catastrophe losses, the pandemic, supply chain disruption and the Ukraine conflict,” he said. “All these have led the reinsurance sector to look at their risk exposure and how much they are charging for taking on that risk. And that will keep going up substantially,” Douville said. Insurers have benefited from a favourable reinsurance market during recent years, with reinsurers picking up much of the big losses from natural catastrophes, the pandemic and Ukraine war, according to Douville. “The use of reinsurance has been good for the non-life sector, going into these various challenges. A lot of the losses direct carriers would have suffered from have been passed to the reinsurance market. This has been good for the direct market and a challenge for reinsurers,” he said. The insurance and reinsurance market will also face a higher cost of capital as tightening monetary policy results in higher interest rates. This will add to pressure on reinsurers that are already dealing with higher natural catastrophe losses through climate change. The reinsurance sector has been particularly challenged with attracting capital in recent years due to disappointing returns, according to Marcos Alvarez, head of global insurance ratings at DBRS Morningstar. Capital has been moving from the traditional to the alternative reinsurance market through catastrophe bonds, while some reinsurers have expressed their intention to exit the catastrophe market, he said. “The cost of capital for reinsurers is a particular challenge, given the increases in catastrophe claims, partially due to climate change,” Alvarez said. While inflation and higher reinsurance costs raise questions for non-life insurer profitability, rising higher interest rates are a positive despite the hit to capital in the first half caused by volatility in equity and bond markets. Higher interest rates could even temper increases in premiums, according to Douville. “We do not see this as a problem for non-life insurers because, even though they may take a hit in the short term, ultimately you will earn more on your investments as bond yields rise and that will enable you to have a bit more investment margin, and price [the extra return on investments] into premiums,” he said.

Inflation and reinsurance costs put squeeze on European insurers

Want to read this article?

Read Next

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Claims likely to increase as vessels remain stranded in Baltimore

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Claims likely to increase as vessels remain stranded in Baltimore

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Want to read this article?

Read Next

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Claims likely to increase as vessels remain stranded in Baltimore

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Related Articles