Inflation will continue to impact the reinsurance market, but some of the pressure on energy prices will abate, according to AM Best, speaking in a press conference in Monte Carlo yesterday (September 11).

The market faces a complex and changing risk environment characterised by secondary perils and emerging risks. Other headwinds highlighted by AM Best include social inflation and modelling challenges.

The modelling challenges include the increased unpredictability of risks and past over-reliance on cat models. The dividing line between “primary” and “secondary” perils is becoming more blurred, and AM Best is seeing greater impact from human behaviour and government intervention. It noted that while casualty/specialty seems attractive and more stable, the modelling is still in early stages.

Economic uncertainty continues amid inflation, rising interest rates, and the risk of recession—and in the light of this, investors are re-assessing their risk appetites. At the same time, the industry faces the risk of becoming less relevant in the broader economy.

Carlos Wong-Fupuy, senior director, Global Reinsurance Ratings at AM Best, noted that, comparing the current cycle to previous ones, the main difference is that key themes seen in the past—significant events in the cat space, hardening rates, and new capital entering the market—are happening at a slower pace.

He also addressed inflation and the impact of the war between Ukraine and Russia on supply chains.

Addressing the topic of inflation in more depth, Greg Carter, managing director, Analytics, EMEA & Asia Pacific at AM Best, noted the unprecedented increase in money supply in the eurozone since the global financial crisis. The pressures of the post-COVID environment, the demand surge as the world started to move again, and supply chain disruptions, caused inflation to kick off—albeit not as quickly as might have been expected.

“The war in Ukraine has added fuel to the fire that was already well alight,” he said. “This coincides with a couple of other trends in terms of energy supply in Europe, particularly French nuclear power production, and Norwegian hydro production, both of which have suffered major disruptions during the summer.”

The good news, he added, is that some of those stresses will abate with nuclear reactors and hydropower relieving the pressure on energy prices.

“Longer term, though, there’s bad news in terms of China’s zero-COVID strategy that will result in continued lockdowns and disruptions, and major supply chain disruptions given how much the world depends upon Chinese production—so there are a lot of pressures in terms of inflation that are not going to go away,” Carter added.