Price pressures are set to dominate upcoming renewal talks as reinsurers try to tackle inflation and its long-term impact on claims, according to Berkley Re Asia Pacific CEO Glenn Riddell.
“The challenge with insurance and reinsurance is that we are putting a price on a product where we don’t know the ultimate claims cost until many years into the future. Volatile inflation has exacerbated this challenge,” Mr Riddell said.
For property lines in particular, higher rebuilding costs are a prime driver of claims cost but ongoing supply chain challenges, labour shortages and wage inflation have made it particularly difficult to predict how future costs will play out.
Latest Australian Bureau of Statistics (ABS) data released last week show annual inflation rose 6.9% in the 12 months to October, easing slightly from 7.3% in the previous period to September.
ABS says high levels of building construction activity and ongoing shortages of labour and materials continue to drive higher prices for new dwellings. The annual headline housing price went up 10.5% in October, compared with 10.3% in September.
According to Mr Riddell, skilled tradespeople and building materials are increasingly difficult to source as a result of pent-up demand and ongoing massive repair operations in flood-affected areas.
Building and construction costs have subsequently increased, coinciding with a rise in material costs globally.
Mr Riddell says the flow-on effect from inflation will still be felt by the insurance and reinsurance industry for some time to come.
“This is an area that the reinsurance industry is focusing on in the lead-up to the upcoming treaty renewals as increased building costs should result in higher sums insured,” he said.
“It is important that the sums insured reflect the true costs of rebuilding, so that the customer has full coverage, but also that premiums are collected that are commensurate with the risk. Inflation affects both smaller and larger claims.”
Mr Riddell also expects reinsurers to factor in other potential inflationary factors such as demand for building services and materials after a natural catastrophe.
For liability lines, the challenge can be tougher as claims are long-tail in nature and not paid until years in the future.
“Liability also is faced with the challenge of medical inflation which often runs higher than general inflation due to new medical technologies that can add to the cost of a claim and also the longevity of claims as people are living longer due to medical technology innovation,” Mr Riddell said.