Rising inflation, supply chain problems and heightened Cat risk mean primary insurers need to review their reinsurance programme choices.
The Three I’s – inflation, indemnity periods, and increasing catastrophes – dominate the agenda for reinsurance buyers going into 2023. Against a background of extreme weather (in Q3 2022 there were insured global natural catastrophe losses of around USD 100 billion) prices for goods and services are rising steeply. Simultaneously, compounded by COVID‑19’s continuing drag on labour and material availability, setting adequate indemnity periods is now more difficult than ever.
Inflation and valuation
There’s no escape from talk of inflation: Skyrocketing energy costs and soaring food bills fill the headlines. The impact on our industry is no different, and we are on course to experience inflation levels not seen in several decades.
The surge in construction materials prices that was already underway as economies began reopening in 2021 is unlikely to abate.1 Cost data for construction materials in Germany, which is representative of other Western European markets, gives a sense of the magnitude of these pressures (2021 data):
- Solid construction timber: +77.3%
- Industrial/logistics land: +60.0%
- Rebar steel: +53.2%
- Concrete reinforcing steel mesh: +52.8%
It is more important than ever for carriers to make sure that insurance values are adequate. Whether this is achieved by index linking or by revaluation, the days of “unaltered sums insured” are surely over.
It is also a good time for insurers to review policy excess and deductible levels and consider applying inflationary allowances. Physical damage loss estimates should also now reflect future rebuilding costs, as well as higher claims costs.
Indemnity period uncertainties
Setting an adequate indemnity period has never been easy – but it’s getting harder. When placing an annual policy, it can feel like you are staring into a crystal ball trying to predict how long it will take a business to recover post loss.
What’s the problem?
The simple answer is that rebuilds are taking longer to complete because of COVID‑19’s impact on labour and supplies availability. For example, lead times for insulation materials have increased from two to three weeks pre‑pandemic, to four to five months post-pandemic with no improvement in sight, according to Cumming Group, the international project management and cost consulting company.2
Several large losses, along with the war in Ukraine, have added to a global supply shortage. The repercussions of a major semiconductor loss in 2021, for example, are still being felt in the car industry going into 2023 – such is the shortage of microchips that the used car market is appreciating, rather than depreciating.3
Permits and planning, along with the push for sustainable construction projects, are contributing to rebuild lead times. The problem is exacerbated when properties are historic or listed, due to the number of stakeholders involved.
Business interruption loss estimates also need to reflect longer reconstruction periods, disrupted supply chains and planning constraints.
Twelve months is rarely, if ever, adequate when it comes to indemnifying an insured for a large loss. By sharing experiences and insight and challenging the information we’re presented with, we can all play a part in setting accurate indemnity periods.
Increasing Catastrophe – coverage rethink
2022 has been an intense year globally for nat cats and insured losses seem certain to top USD 100 billion for the third year in a row. Secondary perils such as severe convective storms and flooding dominated the loss picture in the first half of the year, while primary perils accelerated in the third quarter due to tropical cyclone activity in the Atlantic and Western Pacific.
Hurricane Ian, which swept through Florida in September, is set to be the costliest weather event for the year, at circa USD 65 billion insured losses and could grow to be one of the largest loss events on record.
According to Aon’s Q3 Global Cat Recap, the US accounted for the biggest share of year-to-date losses (USD 114 billion), followed by Asia Pacific (USD 56 billion) and EMEA (USD 42 billion).4
There was severe flooding in Australia and South Africa, wildfires and hailstorms in France, and, most recently, typhoons in Asia. The true quantum of these losses is hard to assess given traditional demand surge paired with the effect catastrophes can have on inflation and global supply chains.
What does all this mean for insurers and their reinsurance structures?
Insurers retentions are increasing as treaty reinsurers revise cat cover terms and conditions. Increased net retentions could be reduced via use of facultative reinsurance which might also help to lower insurers’ cat probable maximum losses.
Increased values as a result of inflation and up to date building valuations will require additional capacity on a risk basis. Facultative reinsurance could provide a cost-effective solution to manage larger risk exposures.
As property reconstruction periods increase so does the resultant business interruption loss. Today the same physical damage loss would trigger a much larger total loss than might have been the case a few years ago. This means an increased frequency of large losses. Facultative reinsurance, protecting an insurer’s net retention, could be a way of managing this increased frequency of severity.
This is clearly a time for P&C insurers to leverage the value that reinsurance can bring; to manage the volatility created by the Three I’s and to sustain growth. As a direct reinsurer with a global network, Gen Re has a strong presence in many markets, so don’t hesitate to get in touch and ask us about living with the Three I’s.
- Destatis, 10 February 2022: Construction material prices rose sharply in 2021 https://www.destatis.de/EN/Press/2022/02/PE22_N006_61.html; ING, 2 September 2022: EU construction sector suffers multiple setbacks
- Post-COVID Lead Times – Cumming (cumming-group.com), abcNews, 9 February 2022: Used car prices at record high, chip shortage and high demand to blame https://abcnews.go.com/Business/car-prices-record-high-chip-shortage-high-demand/story?id=82776041
- euronews, 18 November 2021: Car sales in Europe hit record low due to global microchip shortage, https://www.euronews.com/2021/11/18/car-sales-in-europe-hit-record-low-due-to-global-microchip-shortage; MarketWatch, 7 September 2021: Chip shortage means vehicle inventory likely won’t recover until 2023
- Aon, 14 October 2022, Q3 Global Catastrophe Recap, www.aon.com