Cyber Risk in Reinsurance
February 12, 2025
It is common for insurance companies to not hold the entire risk that they underwrite on their own portfolios. Instead, insurance companies try to find ways and means to offload some of this risk to other entities. This is common with all types of insurance. However, it becomes more pronounced with catastrophe-related insurance. This is […]
When we define reinsurance, we often say that is a type of insurance for insurance companies themselves. This statement gives the impression that the reinsurance contract is very similar to the insurance contracts which individuals enter into. This is not completely true. There are significant differences between an insurance contract and a reinsurance contract. Some […]
The study of human memory since ages has been a topic of interest for the school of cognitive psychology. Human memories of all individuals can never be same. Human memory refers to a process of acquisition, storage, retention and retrieval of information. Human memory has the ability to store and recall the previously learnt information, […]
Motivation is the word derived from the word ’motive’ which means needs, desires, wants or drives within the individuals. It is the process of stimulating people to actions to accomplish the goals. In the workplace, several psychological factors can drive motivation. Some psychological factors in workplace motivation are: desire for money success recognition job-satisfaction team […]
This module has covered the various aspects of change management and the roles played by senior management as well as the CEO in top down change and the role of employees at all levels in bottom up change. This article looks at the role played by “support functions” in an organization in facilitating change. Specifically, […]
The key economic theme which has dominated virtually all of the economic discourse in 2022 has been inflation. Countries around the world have seen inflation rise to record levels. Countries like the United States have taken stringent measures to combat inflation.
A record number of interest rate hikes have been undertaken by the American central bank in order to slow down inflation. However, it seems like the efforts are not bearing fruit. Even after the rate hikes, inflation continues to remain persistently high and is impacting almost every sector of the economy. As a result, most economic pundits in the world believe that we are going to live in an era of persistently high inflation for a while.
The reinsurance sector is not immune to inflation either. The reinsurance industry has witnessed a severe impact due to inflation.
In this article, we will have a look at the various ways in which inflation is impacting the reinsurance sector.
On average, reinsurance companies pay out claims 2.9 years after they begin taking premiums from the customers. This means that the real value of the money taken in the form of a premium keeps on decreasing if inflation is high. As a result, the loss value of the claim made is higher. As a result, insurance companies have to make higher payments.
Persistently higher inflation leads to higher payouts. Over time, this can have a detrimental effect on the health of a reinsurer. Even if they are able to predict the magnitude of events and the losses in terms of lives and property loss, they are unable to predict the monetary loss because of increasing inflation.
Now, firstly there is a time lag between inflation and increased premiums which means that the margins have already taken a hit.
Secondly, companies in the reinsurance market have to deal with other insurance companies who are very savvy when it comes to understanding how premiums are calculated. Also, the market for reinsurance is globalized to a large extent. All of this means that the market for reinsurance has cut-throat competition. Hence, raising premiums can be very difficult due to competitive forces.
The end result is that even though premiums are raised across the industry, they are not raised in the same proportion as the rise in claims. Also, if reinsurance companies insist on raising premiums while ignoring the competition, many of them end up losing a significant chunk of their revenues.
Theoretically, the rising interest rates should have countered inflation and the rate should have fallen drastically. However, in the short run, there has been no significant impact on inflation. Inflation has stopped increasing. However, it is not reducing as well and as a result, has become stagnant. This unpredictability makes it very difficult to adjust premiums proactively. As a result, reinsurance companies have no option but to play catch up with inflation numbers.
Stocks, bonds, bullion, and almost every other financial instrument lose value when interest rates begin to rise. This means that the investment value of the holdings held by insurance companies also starts to go down. This can be very problematic given the fact that most reinsurance companies are also witnessing escalating costs of claims simultaneously. Reinsurance companies need to take additional steps in order to ensure that their portfolios do not lose value during inflation.
The fact of the matter is that inflation is one of the biggest issues which insurance companies across the world are facing as of now. Along with increasing premiums, reinsurance companies will also have to cut costs, or else they will witness a drop in the number of customers as well as the revenue generated by the firm.
Your email address will not be published. Required fields are marked *