As the world moves from its pandemic-stricken state to one in which it faces the threat of a global recession, reinsurers continue to play their role in support of the insurance industry. Nicolas Carro, Munich Re’s life reinsurance chief executive for Australia and New Zealand, says they are on the lookout amid a heightened risk environment.
“The biggest challenge for life insurance in general and, to a certain extent, also to reinsurance is, in my view, the question of affordability of insurance in the near future,” said Carro during a panel session at the Financial Services Council Conference 2022. “Obviously, COVID has taken its strain already, but a lot of programmes from the government to support here have dampened this impact.
“We’ve heard there’s a lot of uncertainty around the economic development. And in case of recession, the first thing people would look at is what kind of short-term costs they could save on, and the cancellation of a life insurance policy is very often the first action they take, understandably. Of course, this has more long-term implications, so that’s why we have a role to play to support the industry.”
Part of the challenge is the double whammy of persistent inflation and higher interest rates.
Carro told attendees: “It’s quite unlikely that we will have, in the short term, a scenario where we come back to low inflation and low interest rates in combination. Therefore, whether it’s inflation staying higher or interest rates, there are challenges here on the topic of affordability.
“If home loans and mortgages get high, of course that will put the economy under strain and that will certainly push the risk of recession to a very high level. And recessions for insurers are, in the life space, historically correlated with higher claims levels. So, obviously, there’s a heightened risk environment here for us if a recession comes, and this is definitely on our watch at Munich Re.”
In a statement last month, Reserve Bank of New Zealand Governor Adrian Orr highlighted the global events that have driven financial markets volatility.
“The Russian invasion of Ukraine at the start of 2022 sparked a sharp increase in global fuel and food costs, adding to already elevated inﬂation globally,” noted Orr. “International trade patterns have been disrupted by the Ukraine war and COVID-19-related lockdowns in major Chinese cities, adding to ongoing production and trade bottlenecks.
“In response to high inflation, central banks around the world have been raising their interest rates, often at pace. These global events have all contributed to periods of significant volatility in financial markets, adding to the challenging economic environment. In New Zealand, we have remained in a period of radical uncertainty.”
Meanwhile, Carro believes the changes we’re witnessing now are undoubtedly having an impact on insurance products.
“It will be interesting to see how the features of some of the products which were developed years ago behave from a claims perspective in today’s societal environment, which is quite different from what it used to be,” he declared. “And on the positive side also – [for instance], the acceptance of mental health as a disease is much more widespread in society; there’s no doubt about that.
“The challenge for the industry is just that some of the products which it developed years ago were not really prepared for this scenario. And there’s a catch-up, which has been taking place already, but probably hasn’t had, yet, the test of a really recessional environment.”
As for the role of the reinsurer at this time, the CEO pointed to the advantage of being an international enterprise.
“Being global allows us to help insurers insure risk which wouldn’t be insurable otherwise,” asserted Carro. “A very prominent risk on the general insurance side in New Zealand is the earthquake risk, which if you would price this risk standalone would probably not be insurable anymore. But because we also reinsure earthquake risk in Mexico, cyclone risk in Australia, hurricane risk in the US, that pool of diversification makes it possible for us to offer [cover] at acceptable prices.
“And the same applies, to a lesser extent, also in the life insurance space where for very high sums insured, or let’s say accumulation risks in certain lines of business, we also help here to reduce the risk. So, globally it’s about diversification; locally, it’s about risk management to support our clients here to reduce, basically, their balance sheet risks by taking either a share of the risks or taking over the peak risks in their business. That’s probably the biggest opportunity.”