Reinsurance capacity is expected to decline, according to a new report from Munich Re, as the insurance industry continues to be burdened by extreme inflation, rising interest rates and asset slumps, along with the war in Ukraine.
For the first time since 2018, Munich Re has projected lower reinsurance capital for the current year, calling the anticipated decline in capacity “substantial” compared to previous years. The report cited data from AM Best and Guy Carpenter, which showed a decline by over 8% to $435 billion.
According to Munich Re, European reinsurers have been hit particularly hard by recent economic challenges, especially with the sharp rise in the US dollar against the Euro. Their capacity has also been impacted as US dollar liabilities increase appreciably when converted to Euros.
Capacity shortages are also emerging in the short term for some reinsurance segments, such as natural catastrophe covers. Munich Re said that several insurers have reduced capacity in certain areas or have withdrawn entirely. Moreover, the market for alternative risk transfer hasn’t growth, with its volume of capital invested remaining roughly unchanged at $100 billion.
Despite these challenges, demand remains on the rise, with the global property-casualty reinsurance market set to grow at least as strongly as the primary insurance market until 2024. According to Munich Re’s Economic Research Department, the reinsurance sector will grow by 2-3% worldwide from 2022 to 2024 when adjusted for inflation.
“We are remaining disciplined, but seize opportunities as they arise,” said Torsten Jeworrek, a member of Munich Re’s board of management. “In doing so, we take great care to factor in inflation with due caution. Given appropriate conditions, we continue to support our clients with our financial strength and capacity. Where risks have heightened, such as in cyber or as a result of climate change, we need sufficient margins in our underwriting. 2022’s renewal rounds so far have taken appropriate account of our prudent consideration of inflation changes, and rising interest rates will have a positive effect on our return on investment in the medium term. All in all, we remain firmly on track to meet our Ambition 2025 strategy targets.”
Munich Re also pointed to the effects of climate change on the industry, calling it “humankind’s greatest challenge in the long term.”
“The impact of climate change is evident and has been proven many times over,” said Thomas Blunck, another member of Munich Re’s board of management. “Insurers also have to gear their risk management to this reality. For example, we are cultivating new high-resolution risk models for regional events such as flash flooding. Given the losses incurred, it is necessary to develop a deeper understanding of these events now in order to be able to take better precautions. In addition, a combination of greater prevention and a higher level of coverage through insurance is important, with risk-commensurate prices being the prerequisite.”
Considering the impact of climate change, Munich Re has predicted substantial business potential to arise from the insurance demand generated by businesses transitioning towards climate neutrality, with data from the International Energy Agency (IEA) indicating that global investment in renewable energies for the generation of electrical power would need to triple from 2022 onwards annually by 2030 to achieve net-zero carbon neutrality by 2050.
In this regard, the group’s Green Tech Solutions has developed cover for green hydrogen production plants, relieving manufacturers, operators or investors of availability or performance risks, while also easing the financial burden. This reduces a key risk for investors and lowers the bar for finance. Munich Re said it has begun talking to potential pilot clients for this solution.