The ‘Power of Inflation’ to Drive Domestic Cat Price Hikes: VIG Re

Inflation and a hardening market could easily push natural disaster prices up 30% this year as the market sees a ‘fundamental shift’ from previous years, according to Johannes Martin Hartmann (pictured), chairman of Vig Re.

“It looks like it’s the power of inflation, and it would be considered that on average the retentions and limits [where reinsurers/cedants retain more risk] will increase by 10%, as the assumptions regarding the total sum insured and the probable maximum losses will have to be revised,” he said.

Ceding companies’ risk retention is expected to increase “because inflation is reducing the value of priorities and franchises,” the VIG Re chairman said. Smart insurer.

In addition to the effects of inflation, retentions will increase where programs have experienced repeat losses.

“I’ve seen a tightening of the retro market, so there’s less capacity for some areas. Even if you’re not affected by the losses, it’s entirely possible that you’ll see price increases of 30% on a like-for-like basis just because of the effects of inflation and market hardening. It wouldn’t be completely out of the box,” Hartmann said.

In terms of cedant retention, he added, it will ultimately depend on what steps cedants take to mitigate the impacts of inflation on their portfolio. With that in mind, he said, questions to consider will be: “What steps have you taken to adjust the sum insured, deductibles or premium rates? and “How has your portfolio performed against the market?”

“There will be tough discussions, probably the most intense I’ve seen in 20 years.” Johannes Martin Hartmann, VIG Re

Growth areas

VIG Re is part of the VIG Group, the largest insurer in Austria and Central and Eastern Europe. VIG Re is the group’s reinsurance company and has several missions. One is to purchase reinsurance protection on behalf of the VIG Group, thereby placing the business of approximately 50 insurance companies that all cede to VIG Re.

Additionally, VIG Re writes a fair amount of business with third parties; it represents approximately 40% of its gross written premiums and the majority of its retained business.

As part of growth plans, the reinsurer has opened two branches in recent years, in Frankfurt and Paris. The first deals with Austria, Germany, Switzerland and the Nordic countries and the second covers France, Benelux, the Iberian Peninsula and the Maghreb countries.

In 2021, VIG Re reported business growth of 19% and a record pre-tax profit of 26.8 million euros ($26.9 million), which the reinsurer achieved despite a year of losses. cat nat record.

Looking to 2022 and beyond, Hartmann said he expects “significant hardening” in the nat cat market.

Over the past few years, there has been an abundance of capacity with new capital coming in, so there has been plenty of reinsurance supply, mainly due to the low interest rate environment, he said. he declares.

“Investors were looking for alternative investments and higher returns uncorrelated to financial market performance, so there was a constant flow of capital into the reinsurance market.

“But in 2022, the situation changes fundamentally. There is no more massive influx of capital, interest rates are rising and all investors’ expectations or reinsurance returns have not materialized,” he added.

“We see markets that have pulled back from reinsurance again because they now see other, more attractive ways to invest. So there is no significant flow of capital there. On the other hand, we are seeing an increase in demand. Businesses would like to protect themselves to a higher or higher level, especially against nat chat.

Looking at the sector more broadly, Hartmann suggested there could be a “perfect storm” ahead. “Extreme weather events are becoming more frequent and we are all feeling the growing impact of geopolitical crises, such as Russia’s war in Ukraine. We have inflation and we have a growing threat of recession, so I think there are tough times ahead,” he said.

Regarding the industry, Hartmann said many reinsurers have not earned their cost of capital.

“They are in a tough spot and hope market conditions will improve,” he said. “We have to prepare for a very interesting revival – there will be some tough talks, probably the most intense I’ve seen in 20 years.”

Monte Carlo Rendez-Vous, VIG Re, Inflation, Catastrophe, Insurance, Reinsurance, Johannes Martin Hartmann, Monte Carlo