The insurance industry is currently struggling with two things. On the one hand, the losses caused by natural disasters, such as storms or floods, continue to increase. On the other hand, galloping inflation is making it increasingly expensive to replace the damage.
Archibald Preuschat
Editor in Business
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"We have to have price stability again, otherwise no sustainable growth is possible," says Jérôme Jean Haegeli, chief economist of the reinsurer Swiss Re, in an interview with the F.A.Z.
The past year was the second year in a row in which insured losses exceeded the $100 billion mark, according to calculations by Swiss Re, one of the leading companies in the insurance industry. In 2022, insured losses caused by natural catastrophes amounted to 125 billion dollars, which was another 4 billion dollars more than a year earlier. By comparison, the ten-year average is $81 billion.
Losses become more expensive due to inflation
Inflation plays a significant role in this development. In 2022, it averaged 7 percent per year in industrialized countries and 9 percent in emerging markets. Higher prices have made buildings, vehicles and other insurable assets nominally more expensive, thereby also driving up natural catastrophe-related insurance losses, Swiss Re argues.
"The economic storm is not over yet, and given the existing inflationary pressures, interest rates will probably have to rise further. As this leads to higher financing costs, capacity providers are likely to remain cautious for a variety of reasons," says Haegeli.
No bank run on insurers
However, the chief economist of Swiss Re dismisses the fact that insurers are under just as much stress as banks: "It is a perfect storm of sharply increased losses caused by natural catastrophes coupled with record-high inflation. But the perfect storm can be designed. There will be no bank run on insurers," he is convinced.
Of course, insurers who have to invest premiums as profitably as possible are also exposed to the distortions on the financial market. However, investments are mainly made in safe government bonds. The fact that insurers also hold AT1 bonds from banks, such as Credit Suisse's now possibly worthless ones, is generally unusual in the industry.
Premiums increase
Design is primarily about the price. – every year in December and January when the new premiums are negotiated. "We saw very strong price increases, and they were necessary," says Haegeli. If inflation falls, insurance prices will also level off, he is convinced.
This also carries the risk that consumers will save on insurance. But according to Haegeli, this has been real for a long time: "There is a global insurance gap of 60 percent," which means that only 40 percent of claims are insured, "the rate in Germany is slightly better at 55 to 60 percent," he says. "In the USA, for example, only one in six is insured against flood damage. However, half of them believe they are sufficiently insured," adds the Swiss Re manager.
In Germany, for example, only less than 2021 percent of flood losses were actually insured in 30, Haegeli adds. "The biggest risk for consumers is not being insured or underinsured," warns the Swiss Re chief economist.