NEWS
The uncertainty around inflation is the biggest challenge
Underwriters of long-tail business are advised to reprice business based on uncertainty as much as inflation, says Swiss Re.
Pricing long-tail business is not necessarily easy. Trying to get it right during the still-ongoing inflation shock is particularly tough—but this is partly because underwriters have simply never seen conditions and uncertainty such as these before.
That is the view of Swiss Re’s group chief economist Jérôme Haegeli, who warns underwriters to consider packing some extra rate—not necessarily because of the risk of inflation alone, but because of the countless raw uncertainties among its many drivers.
“Just because the global economy has been resilient, we shouldn’t be complacent; the risk that something breaks is not small,” Haegeli told Baden-Baden Today.
Haegeli is starting with a set of forecasts that are less than friendly for underwriters, with slowing growth against sticky heightened inflation.
Economic slowdown may take global gross domestic product growth from 3 percent in 2022 to 2.5 percent this year and 2.2 percent in 2024. But what growth there is doesn’t have that much core market to it. The US may slow from 2.1 percent in 2023 to 0.9 percent in 2024. The euro area will limp from 0.4 percent to 0.3 percent.
“The uncertainty is much more difficult to price than risk.”
Jérôme Haegeli, Swiss Re
Inflation will hold above central banker targets through 2024. Annual inflation, on track for 4 percent in the US and 5 percent in the euro area in 2023, will still be a half point above a would-be 2 percent target in the two jurisdictions in 2024. The task for central bankers is trying to get annual inflation readings to target, but severely heightened prices will firmly be in place.
A lot of forecasts seem still to be written in pencil. These are no times to be discussing “risks” to the economic outlook amid the “sheer level of uncertainty we have”, Haegeli said.
“The uncertainty is much more difficult to price than risk; you just don’t have that level of history,” he added.
The immediate pricing upshot: “rate hardening will continue”. The implication: beyond what any official inflation forecast you might have pencilled in would justify.
“The long-tail lines such as casualty need close price-adequacy monitoring,” Haegeli said. Property insurers may have responded to the price shock, with caveat for a delay here or regulatory blockage there. Casualty cedants “have not seen the strengthening” in pricing for the movement afoot in costs, Swiss Re suspects.
Main image: Shutterstock / GVLR
